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The implementation of the countercyclical capital buffer: rules versus discretion
One of the key lessons of the global financial crisis is that policymakers need instruments to mitigate the potential impact of a build-up of risks in the financial system. Against this background, the countercyclical capital buffer will be one of the main instruments available to macroprudential authorities. According to the Basel Committee, the calibration of this buffer will be guided by the calculation of the deviations of the credit-to-GDP ratio from its long-term trend. In this article, we perform a sensitivity analysis to the calibration of this so-called “buffer guide”, showing that the results are sensitive to the methodologies used and to the assumptions made. Furthermore, we analyze several other indicators with leading and near-coincident properties, which may potentially be relevant in guiding buffer decisions. Our analysis confirms that the credit-to-GDP gap is amongst the best performing indicators in predicting banking crises, but shows that other indicators also display good signalling properties. As such, a large set of quantitative and qualitative information should be considered when setting the countercyclical buffer rate.