Calibrating the Magnitude of the Countercyclical Capital Buffer using Market-based Stress Tests
Journal of Money, Credit and Banking (forthcoming)
52 Pages Posted: 16 Jun 2018 Last revised: 29 Sep 2020
Date Written: May 21, 2020
This paper proposes a novel methodology to calibrate the magnitude of the countercyclical capital buffer (CCyB) using market-based stress tests. The macroprudential authority in our paper aims to contain the possibility of a breach of a minimum capital ratio in the event of a severe system-wide shock within a certain permissible failure probability. We apply the methodology by stress-testing major banks in six advanced economies on a quarterly basis over a period of 27 years. The estimates suggest that the cap on the CCyB should not be less than around 1.7 percent of total assets. Its potential normal-times level is estimated at approximately 0.8 percent of total assets.
Keywords: Financial stability, capital requirements, CCyB, stress test, marginal expected shortfall, exposure CoVaR
JEL Classification: G10, G21, G28
Suggested Citation: Suggested Citation