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Evaluating Indicators for Use in Setting the Countercyclical Capital Buffer

Author

Listed:
  • Eero Tölö

    (Bank of Finland)

  • Helinä Laakkonen

    (Bank of Finland)

  • Simo Kalatie

    (Bank of Finland)

Abstract

The European Systemic Risk Board (ESRB) recently issued a recommendation on the use of early warning indicators in macroprudential decisions involving the countercyclical capital buffer (Basel III framework). In addition to a primary indicator, deviation in the credit-to-GDP ratio from long-term trend, the ESRB advises the use of supplemental indicators to measure private-sector credit developments and debt burden, overvaluation of property prices, external imbalances, mispricing of risk, and strength of bank balance sheets. Based on empirical analysis of data for European Union countries, a large assortment of potential indicators, and comprehensive robustness checks, we propose specific suitable early warning indicators for each of the six risk categories set forth by the ESRB.

Suggested Citation

  • Eero Tölö & Helinä Laakkonen & Simo Kalatie, 2018. "Evaluating Indicators for Use in Setting the Countercyclical Capital Buffer," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 51-112, March.
    • Handle: RePEc:ijc:ijcjou:y:2018:q:1:a:2
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    References listed on IDEAS

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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