A Multiplicative Model of Countercyclical Capital Buffer Evaluation Differentiated by Homogeneous Clusters of Countries

Fuad Aleskerov, Azamat Keskinbaev and Henry Penikas

HSE Working papers from National Research University Higher School of Economics

Abstract: The Basel Committee introduced countercyclical capital buffers in order to mitigate the effects of bank capital procyclicality, which is to say the decrease in the capital adequacy of banks in economic downturns. The ratio of loans to GDP was taken as the proxy for the economic cycle signaling variable. Nevertheless, Repullo and Saurina (2011) have proven that the credit-to-GDP ratio is not as accurate at predicting the stage of economic cycle as the GDP growth rate. They proposed a theoretical framework for capital buffer calculations based on GDP growth rate dynamics. We extend the countercyclical capital buffer analysis in two directions. First, empirical criteria to implement Repullo and Saurina’s model are proposed and justified. Second, the countercyclical capital buffer parameter, a, is then differentiated according to clusters of countries that display homogeneous patterns of macroeconomic variables dynamics. Lastly, the countercyclical capital buffers based on the Basel Committee’s approach and on the Repullo and Saurina model are then compared.

Keywords: Basel III; capital buffer; minimum capital requirements; credit-to-GDP; pattern cluster analysis (search for similar items in EconPapers)
JEL-codes: C38 C61 G20 G21 G28 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2012
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Published in WP BRP Series: Financial Economics / FE, July 2012, pages 1-15

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