The credit-to-GDP gap and countercyclical capital buffers: questions and answers

Mathias Drehmann and Kostas Tsatsaronis ()

BIS Quarterly Review, 2014

Abstract: Basel III uses the gap between the credit-to-GDP ratio and its long-term trend as a guide for setting countercyclical capital buffers. Criticism of this choice centres on three areas: (i) the suitability of the guide given the objective of the buffer; (ii) the early warning indicator properties of the guide for banking crises (especially for emerging market economies); and (iii) practical measurement problems. While many criticisms have merit, some misinterpret the objective of the instrument and the role of the indicator. Historically, for a large cross section of countries and crisis episodes, the credit-to-GDP gap is a robust single indicator for the build-up of financial vulnerabilities. As such, its role is to inform, rather than dictate, supervisors' judgmental decisions regarding the appropriate level of the countercyclical buffer.

JEL-codes: E44 E51 E61 G01 G21 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (167)

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