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Evaluating Indicators for Use in Setting the Countercyclical Capital Buffer

Eero Tölö, Helinä Laakkonen and Simo Kalatie
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Eero Tölö: Bank of Finland
Helinä Laakkonen: Bank of Finland
Simo Kalatie: Bank of Finland

International Journal of Central Banking, 2018, vol. 14, issue 2, 51-112

Abstract: The European Systemic Risk Board (ESRB) recently issued a recommendation on the use of early warning indicators in macroprudential decisions involving the countercyclical capital buffer (Basel III framework). In addition to a primary indicator, deviation in the credit-to-GDP ratio from long-term trend, the ESRB advises the use of supplemental indicators to measure private-sector credit developments and debt burden, overvaluation of property prices, external imbalances, mispricing of risk, and strength of bank balance sheets. Based on empirical analysis of data for European Union countries, a large assortment of potential indicators, and comprehensive robustness checks, we propose specific suitable early warning indicators for each of the six risk categories set forth by the ESRB.

JEL-codes: G01 G28 (search for similar items in EconPapers)
Date: 2018
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