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

    ESAs Issue Multiple Regulatory Updates for Financial Sector Entities

    The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.

    November 15, 2022 WebPage Regulatory News
    News

    ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments

    The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.

    November 10, 2022 WebPage Regulatory News
    News

    IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets

    The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.

    November 09, 2022 WebPage Regulatory News
    News

    EBA Finalizes Methodology for Stress Tests, Issues Other Updates

    The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups

    November 09, 2022 WebPage Regulatory News
    News

    OSFI Sets Out Work Priorities and Reporting Updates for Banks

    The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.

    November 07, 2022 WebPage Regulatory News
    News

    APRA Finalizes Changes to Capital Framework, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.

    November 03, 2022 WebPage Regulatory News
    News

    BIS Hub and Central Banks Conduct CBDC and DeFI Pilots

    The Bank for International Settlements (BIS) Innovation Hubs and several central banks are working together on various central bank digital currency (CBDC) pilots.

    November 03, 2022 WebPage Regulatory News
    News

    ECB Sets Deadline for Banks to Meet Its Climate Risk Expectations

    The European Central Bank (ECB) published the results of its thematic review, which shows that banks are still far from adequately managing climate and environmental risks.

    November 02, 2022 WebPage Regulatory News
    News

    ESAs, ECB, & EC Issue Multiple Regulatory Updates for Financial Sector

    Among its recent publications, the European Banking Authority (EBA) published the final standards and guidelines on interest rate risk arising from non-trading book activities (IRRBB)

    October 31, 2022 WebPage Regulatory News
    News

    EC Adopts Final Rules Under CRR, BRRD, and Crowdfunding Regulation

    The European Commission (EC) recently adopted regulations with respect to the calculation of own funds requirements for market risk, the prudential treatment of global systemically important institutions (G-SIIs)

    October 26, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8582