Mind the Basel Gap

34 Pages Posted: 10 Jan 2020 Last revised: 26 Jan 2020

Date Written: January 24, 2020

Abstract

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

Jylha, Petri and Lof, Matthijs, Mind the Basel Gap (January 24, 2020). Available at SSRN: https://ssrn.com/abstract=3498165 or http://dx.doi.org/10.2139/ssrn.3498165

Petri Jylha

Aalto University ( email )

P.O. Box 21220
Aalto, 00076
Finland

Matthijs Lof (Contact Author)

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

HOME PAGE: http://sites.google.com/site/matthijslof/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
22
Abstract Views
205
PlumX Metrics