Mind the Basel Gap
38 Pages Posted: 10 Jan 2020 Last revised: 12 Aug 2021
Date Written: August 12, 2021
The Basel credit gap, the difference between a country’s credit-to-GDP ratio and its estimated long-term trend, is used as a basis for setting the countercyclical regulatory capital buffers under the Basel III regulatory framework. Using international data from the BIS, we show that the Basel credit gap, estimated by a one-sided HP filter, is nearly equivalent to a naive 16-quarter change in the credit-to-GDP ratio and performs equally well in terms of predicting banking crises. We demonstrate that the near-equivalence between deviations from trend and simple changes occurs when the one-sided HP filter is applied to an I(1) process.
Keywords: Credit gap, One-sided Hodrick-Prescott filter, Systemic risk.
JEL Classification: C22, E52, G28
Suggested Citation: Suggested Citation