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

Maarten van Oordt ()

Staff Working Papers from Bank of Canada

Abstract: This paper proposes a novel methodology to calibrate the magnitude of the cap on 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. To meet its objective during periods of challenging macro-financial conditions, the macroprudential authority requires banks to build up the CCyB during credit booms. We show how market-based stress tests can be used to estimate the necessary magnitude of the CCyB. We apply the methodology to major banks in six advanced economies. Our estimates suggest a magnitude of the cap on the CCyB in a range from 1.4 to 1.7 per cent of total assets, depending on the ability of the macro-prudential authority to forecast macrofinancial conditions.

Keywords: Financial Institutions; Financial stability; Financial system regulation and policies (search for similar items in EconPapers)
JEL-codes: G10 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-mac and nep-rmg
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:18-54

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