Indicators for Setting the Countercyclical Capital Buffer

Conn Creedon and Eoin O'Brien
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Conn Creedon: Central Bank of Ireland
Eoin O'Brien: Central Bank of Ireland

No 02/EL/16, Economic Letters from Central Bank of Ireland

Abstract: Since January 1 2016, the Countercyclical Capital Buffer (CCB), a new macro-prudential policy instrument, has been operational in Ireland. The CCB, which is a time-varying countercyclical capital requirement, aims to limit the potential systemic risks associated with excessive credit growth. This Letter provides an overview of the CCB and summarises European Systemic Risk Board (ESRB) recommendations on appropriate economic and financial indicator variables to guide the setting of the CCB. A number of indicators are applied to historical Irish data for illustrative purposes. The analysis also highlights challenges that arise in the estimation and interpretation of indicators and, therefore, the importance that policymaker judgement will play in setting the CCB rate.

Date: 2016-04
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