Featured Product

    IMF Paper Analyzes Approaches to Guide Macro-Prudential Policy Setting

    January 17, 2020

    IMF published a working paper that reviews the key limitations of the Basel Credit Gap (BCG) and proposes two alternative approaches that can complement the BCG when assessing credit excesses or deciding whether to activate the countercyclical capital buffer (CCyB). The analysis highlights that the BCG tends to become persistently negative after a pronounced credit boom deflates, implausibly indicating that credit should return to its cyclical peak. This poses questions about the usefulness of the BCG as a guide for macro-prudential policy setting over the full credit cycle.

    The paper on measuring credit gap highlights that assessing when credit is excessive is important to understand macro-financial vulnerabilities and guide macro-prudential policy. The Basel Credit Gap (BCG)—the deviation of the credit-to-GDP ratio from its long-term trend estimated with a one-sided Hodrick-Prescott (HP) filter—is the indicator preferred by the Basel Committee because of its good performance as an early warning of banking crises. However, for a number of European countries, this indicator implausibly suggests that credit should go back to its level at the peak of the boom after the credit cycle turns, resulting in large negative gaps that might delay the activation of macro-prudential policies. The paper presents two different approaches—a multivariate filter based on economic theory and a fundamentals-based panel regression.

    Each approach has pros and cons, but they both provide a useful complement to the BCG in assessing macro-financial vulnerabilities in Europe. The authors show that both methodologies yield credit gaps that turn positive ahead of crises (similar to the BCG) but, unlike the BCG, do not remain negative for an extended period following the burst of a large and prolonged credit boom. The study does not test the crisis early warning properties of these two measures because, as experience with the BCG indicates, focus on these properties may produce a measure that performs poorly in other phases of the credit cycle. Having an indicator that can produce a view of the position of the economy over the entire financial cycle may inform recommendations of broader macroeconomic policy, beyond the decision on the CCyB.

     

    Related Link: Working Paper

     

    Keywords: International, Europe, Banking, CCyB, Macro-Prudential Policy, Basel Credit Gap, Research, Credit Risk, BCBS, IMF

    Featured Experts
    Related Articles
    News

    UK Government to Set Out Rules on Wind-down of Critical Benchmarks

    HM Treasury notified that, after considering all responses, the government intends to bring forward further legislation, when the Parliamentary time allows, to address issues identified in the consultation on supporting the wind-down of critical benchmarks.

    May 07, 2021 WebPage Regulatory News
    News

    EIOPA Launches Stress Test for Insurance Sector in EU

    EIOPA launched the 2021 stress test for the insurance sector in EU.

    May 07, 2021 WebPage Regulatory News
    News

    UK Authorities Publish Third Edition of Regulatory Initiatives Grid

    UK authorities jointly published the third edition of Regulatory Initiatives Grid setting out the planned regulatory initiatives for the next 24 months.

    May 07, 2021 WebPage Regulatory News
    News

    EC Consults on Regulation on Non-Financial Sustainability Disclosures

    EC is requesting feedback on the proposed Commission Delegated Regulation on the content, methodology, and presentation of information that large financial and non-financial undertakings should disclose about their environmentally sustainable economic activities under the Taxonomy Regulation.

    May 07, 2021 WebPage Regulatory News
    News

    OSFI Outlines Prudential Policy Priorities for Coming Months

    OSFI has set out the near-term priorities for federally regulated financial institutions and federally regulated private pension plans for the coming months until March 31, 2022.

    May 06, 2021 WebPage Regulatory News
    News

    BIS Announces TechSprint on Innovative Green Finance Solutions

    Under the Italian G20 Presidency, BIS Innovation Hub and the Italian central bank BDI launched the second edition of the G20 TechSprint on the lookout for innovative solutions to resolve operational problems in green and sustainable finance.

    May 06, 2021 WebPage Regulatory News
    News

    ACPR Publishes Version 1.0.0 of RUBA Taxonomy

    ACPR published Version 1.0.0 of the RUBA taxonomy, which will come into force from the decree of January 31, 2022.

    May 06, 2021 WebPage Regulatory News
    News

    EBA Proposed Regulatory Standards for Central Database on AML/CFT

    EBA proposed the regulatory technical standards on a central database on anti-money laundering and countering the financing of terrorism (AML/CFT) in EU.

    May 06, 2021 WebPage Regulatory News
    News

    ECB Responds to EC Consultation on Crisis Management Framework

    ECB published its response to the targeted EC consultation on the review of the bank crisis management and deposit insurance framework in EU.

    May 06, 2021 WebPage Regulatory News
    News

    BCBS, CPMI, and IOSCO to Survey Market Participants on Margin Calls

    BCBS, CPMI, and IOSCO (the Committees) are inviting entities that participate in market infrastructures and securities markets through an intermediary as well as non-bank intermediaries to complete voluntary surveys on the use of margin calls.

    May 05, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6942