7/2018 Nicolas Reigl, Lenno Uusküla. Alternative frameworks for measuring credit gaps and setting countercyclical capital buffers

Working Papers of Eesti Pank 7/2018

This paper complements the standard Basel countercyclical capital buffer framework by suggesting four additional measures for credit gaps that can be used to measure the financial cycle and to decide on countercyclical capital buffers for banks. The new measures behave similarly to the gaps calculated with the standard Basel one-sided Hodrick-Prescott filter in long samples, but they have the properties desired for countries with relatively short historical samples. While the standard Basel credit gaps have been deep in negative territory for many European Union countries since the Great Recession the new gaps are close to zero and the buffers suggested are more in line with the countercyclical capital buffer ratios that were in place in 2018.

JEL Codes: G01, E59

Keywords: credit gaps, countercyclical capital buffer, Basel III, Estonia

DOI: 10.23656/25045520/072018/0159

The views expressed are those of the author and do not necessarily represent the official views of Eesti Pank, the European Central Bank or the Eurosystem.