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
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ECB published a decision allowing the euro area banks under its direct supervision to exclude certain central bank exposures from the leverage ratio.
ESAs launched a survey seeking feedback on the presentational aspects of product templates under the Sustainable Finance Disclosure Regulation (SFDR or Regulation 2019/2088).
ECB published input of the European System of Central Banks (ESCB) into the EBA feasibility report on reducing the reporting burden for banks in EU.
ECB finalized the guide on assessment methodology for the internal model method for calculating exposure to counterparty credit risk (CCR) and the advanced method for own funds requirements for credit valuation adjustment (A-CVA) risk.
EBA published an Opinion addressed to EC to raise awareness about the opportunity to clarify certain issues related to the definition of credit institution in the upcoming review of the Capital Requirements Directive and Regulation (CRD and CRR).
APRA is consulting on updates to ARS 210.0, the reporting standard that sets out requirements for provision of information on liquidity and funding of an authorized deposit-taking institution.
FED released hypothetical scenarios for a second round of stress tests for banks.
FED is proposing to temporarily revise the capital assessments and stress testing reports (FR Y-14A/Q/M) to implement the changes necessary to conduct stressed analysis in connection with the re-submission of capital plans, using data as of June 30, 2020.
FED adopted a proposal to extend for three years, with revision, the information collection under the market risk capital rule (FR 4201; OMB No. 7100-0314).
EBA published a voluntary online survey seeking input from credit institutions on their practices and future plans for Pillar 3 disclosures on the environmental, social, and governance (ESG) risks.