Credit Cycle and Capital Buffers in Central America, Panama, and the Dominican Republic

29 Pages Posted: 8 Apr 2019

See all articles by Valentina Flamini

Valentina Flamini

International Monetary Fund (IMF)

Pierluigi Bologna

Bank of Italy

Fabio Di Vittorio

International Monetary Fund (IMF)

Rasool Zandvakil

International Monetary Fund (IMF)

Date Written: February 2019

Abstract

Credit is key to support healthy and sustainable economic growth but excess aggregate credit growth can signal the build-up of imbalances and lead to systemic financial crisis. Hence, monitoring the credit cycle is key to identifying vulnerabilities, particularly in emerging markets, which tend to be more exposed to sudden external shocks and reversal in capital flows. We estimate the credit cycle in Central America, Panama, and the Dominican Republic and find that the creadit gap is a powerful predictor of systemic vulnerability in the region. We simulate the activation of the Basel III countercyclical capital buffers and discuss the macroprudential policy implications of the results, arguing that countercyclical macroprudential policies based on the credit gap could prove useful to enhance the resilience of the region's financial sector but the activation of macroprudential instruments should also be informed by the development of other macrofinancial variables and by expert judgment.

Keywords: Exchange rate policy, Credit booms, Central banks, Credit pricing, Credit risk, Credit cycle, Financial crises, Countercyclical capital buffer, Basel III, CPI inflation, GFC, countercyclical, synchronicity

JEL Classification: E30, E44, E50, G10, G20, G28, E52, G21, F16, E63,

Suggested Citation

Flamini, Valentina and Bologna, Pierluigi and Di Vittorio, Fabio and Zandvakil, Rasool, Credit Cycle and Capital Buffers in Central America, Panama, and the Dominican Republic (February 2019). IMF Working Paper No. 19/39. Available at SSRN: https://ssrn.com/abstract=3367424

Valentina Flamini (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Pierluigi Bologna

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Fabio Di Vittorio

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Rasool Zandvakil

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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