Mind the Basel Gap
34 Pages Posted: 10 Jan 2020 Last revised: 26 Jan 2020
Date Written: January 24, 2020
The Basel 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 as well as simulations, we show that the Basel gap, estimated by a one-sided HP filter, is nearly equivalent to a naive 16-quarter change in the credit-to-GDP ratio. 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: One-sided Hodrick-Prescott filter, Basel gap, Credit, Banking crises
JEL Classification: C22, E52, G28
Suggested Citation: Suggested Citation