Calibrating the countercyclical capital buffer for Italy

Pierluigi Bologna and Maddalena Galardo

No 679, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: While the setting of the countercyclical capital buffer (CCyB) is not an automatic decision, insights from indicators, such as the credit-to-GDP gap, are a starting point to inform the policy decision. This paper identifies an optimal rule to map the credit-to-GDP gap adjusted to the guide to set the CCyB. We follow two alternative procedures. First, we apply the criteria suggested by the Basel Committee on Banking Supervision, (BCBS), obtaining 3 percentage points of the adjusted gap as the activation threshold and 8 percentage points as the maximum. Then we depart from the BCBS approach by proposing a procedure based on the maximization of the area under the receiver operating characteristic curve (AUROC), which suggests 1 and 9 percentage points as the minimum and maximum thresholds, respectively. We also explore whether the CCyB, had it been in place, would have mitigated the repercussions of the Great Financial Crisis for the Italian banking system. Based on a stylized exercise, the full release of the CCyB at the outbreak of the crisis would have freed around 40 billion of capital, a value close to the total amount of banks' credit provisions during the three following years.

Keywords: macroprudential policy; CCyB; buffer calibration; credit cycle (search for similar items in EconPapers)
JEL-codes: E32 G21 G28 (search for similar items in EconPapers)
Date: 2022-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-fdg, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_679_22

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