Credit, Capital and Crises: a GDP-at-Risk Approach

66 Pages Posted: 25 Sep 2019 Last revised: 23 Oct 2019

See all articles by David Aikman

David Aikman

Bank of England - Monetary Assessment and Strategy Division

Jonathan Bridges

Bank of England

Sinem Hacioglu Hoke

Bank of England

Cian O'Neill

Bank of England

Akash Raja

London School of Economics & Political Science (LSE) - London School of Economics

Date Written: September 20, 2019

Abstract

How can macroeconomic tail risks originating from financial vulnerabilities be monitored systematically over time? This question lies at the heart of operationalising the macroprudential policy regimes that have developed around the world in response to the global financial crisis. Using quantile regressions applied to a panel dataset of 16 advanced economies, we examine how downside risk to growth over the medium term, GDP-at-Risk, is affected by a set of macroprudential indicators. We find that credit booms, property price booms and wide current account deficits each pose material downside risks to growth at horizons of three to five years. We find that such downside risks can be partiall y mitigated, however, by increasing the capitalisation of the banking system. We estimate that across our sample of countries, GDP-at-Risk, defined as the 5th quantile of the projected GDP growth distribution over three years, on average deteriorated by around 4.5 percentage points cumulatively in the run-up to the crisis. Our estimates suggest that an increase in bank capital equivalent to a countercyclical capital buffer rate of 2.5% (5%) would have been sufficient to mitigate up to 20% (40%) of this increase in medium-term macroeconomic tail risk.

Keywords: financial stability, GDP-at-Risk, macroprudential policy, quantile regressions, local projections

JEL Classification: G01, G18, G21

Suggested Citation

Aikman, David and Bridges, Jonathan and Hacioglu Hoke, Sinem and O'Neill, Cian and Raja, Akash, Credit, Capital and Crises: a GDP-at-Risk Approach (September 20, 2019). Bank of England Working Paper No. 824, September 2019. Available at SSRN: https://ssrn.com/abstract=3459006 or http://dx.doi.org/10.2139/ssrn.3459006

David Aikman (Contact Author)

Bank of England - Monetary Assessment and Strategy Division ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Jonathan Bridges

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Sinem Hacioglu Hoke

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Cian O'Neill

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Akash Raja

London School of Economics & Political Science (LSE) - London School of Economics ( email )

United Kingdom

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