Calibrating the Magnitude of the Countercyclical Capital Buffer Using Market‐Based Stress Tests

Maarten van Oordt

Journal of Money, Credit and Banking, 2023, vol. 55, issue 2-3, 465-501

Abstract: This paper proposes a novel methodology to calibrate the magnitude of the countercyclical capital buffer (CCyB) using market‐based stress tests. The macroprudential authority in our paper aims to contain the possibility of a breach of a minimum capital ratio in the event of a severe system‐wide shock within a certain permissible failure probability. We apply the methodology by stress‐testing major banks in six advanced economies on a quarterly basis over a period of 27 years. The estimates suggest that the cap on the CCyB should not be less than around 1.7% of total assets. Its potential normal‐times level is estimated at approximately 0.8% of total assets.

Date: 2023
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https://doi.org/10.1111/jmcb.12942

Related works:
Working Paper: Calibrating the Magnitude of the Countercyclical Capital Buffer Using Market-Based Stress Tests (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:55:y:2023:i:2-3:p:465-501

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