 Why is credit-to-GDP a good measure for setting countercyclical capital buffers?Esa Jokivuolle (), Jarmo Pesola and Matti Viren Journal of Financial Stability, 2015, vol. 18, issue C, 117-126 Abstract: We examine banks’ loan losses in Europe in 1982–2012 using a nonlinear three-factor model that takes into account output growth, real interest rate, and the ratio of private credit to GDP relative to its trend (i.e., “excessive indebtedness”). We find that a drop in output has an intensified impact on loan losses if the private sector is excessively indebted. Because increased bank credit risk should be matched with higher bank capital, the result motivates the Basel III's countercyclical capital buffers as a function of private indebtedness relative to its trend. The result also helps to explain differences in the amount of loan losses in different recessions across time and across countries. The model also indicates that low interest rates during the recent recession have clearly mitigated loan losses. Keywords: Countercyclical capital buffers; Basel III; Loan losses; Banking crises; Indebtedness; Credit-to-GDP (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:18:y:2015:i:c:p:117-126 DOI: 10.1016/j.jfs.2015.03.005 Access Statistics for this article Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman More articles in Journal of Financial Stability from Elsevier |
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