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Basel III Credit-to-GDP Gaps and the Origins of Their Unreliability: Introducing Historical Reliability Bands

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150
Author
Josefine Quast
Category
Quantitative
Date Posted
2022/08/09
Date Retrieved
2022/09/25
Date Revised
2022/09/25
Date Written
2022/07/31
Description
Basel III credit-to-GDP gaps are used to assess whether aggregate credit is excessive or not and inform macroprudential policymaking. Yet estimates from Basel III’s prescribed detrending procedure are prone to continuous reevaluations that do not reflect changes in the data and exceed commonly discussed end-of-sample biases from converging one- and two-sided filtering procedures. To illustrate the extent of unreliability I introduce historical reliability bands. Based on simulation and empirical evidence for 43 countries I show that estimates do not converge to full sample estimates and each quarter is associated with a new trend history which compromises the comparability of cyclical positions over time. This leads to relevant misalignment in countercyclical buffer decisions in both direction and size and may impair the regulator’s credibility. Alternatively using a two-year difference filter would provide endpoint and historically reliable estimates while yielding distinctly fewer an
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JEL Classifications
C10 C32 E32 E44 G01
Keywords
Countercyclical capital buffers detrending stochastic trends real-time analysis
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Pages
56
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URL
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4228305
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