Countercyclical capital buffers and real-time credit-to-GDP gap estimates: A South African perspective

Greg Farrell

MPRA Paper from University Library of Munich, Germany

Abstract: Countercyclical capital buffers are intended to protect the banking sector and the broader economy from episodes of excessive credit growth, which have been associated with financial sector procyclicality and the build-up of systemic risk. The Basel Committee on Banking Supervision has suggested in its guidance to national authorities that the credit-to-GDP gap be used as a guide to taking decisions regarding the countercyclical capital buffer. This paper provides a South African perspective on the implementation of this guidance. Credit-to-GDP gaps are estimated by applying a range of Hodrick-Prescott filters to real-time South African data, specifically constructed for this study, and these gaps are mapped to countercyclical buffers. The properties of these estimates are compared, and the calibration of the lower and upper thresholds of the buffer in the South African case is also investigated. The study confirms that the mechanical application of the credit-to-GDP guide is not advisable, and raises a number of issues that policymakers will have to consider when implementing the countercyclical buffer guidance. The analysis also suggests that the calibration of the lower and upper thresholds for the gaps may need to be adjusted in the South African case if the Basel Committee’s expectation that the buffers be employed only every 10-20 years is to be met.

Keywords: Countercyclical capital buffers; financial stability; real- time data; credit-to-GDP gaps. (search for similar items in EconPapers)
JEL-codes: E44 E61 G21 (search for similar items in EconPapers)
Date: 2014-04-16
New Economics Papers: this item is included in nep-afr, nep-ban and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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