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A0232
Title: Mind the Basel gap Authors:  Matthijs Lof - Aalto University (Finland) [presenting]
Petri Jylha - Aalto University (Finland)
Abstract: The Basel credit gap, the difference between a country's credit-to-GDP ratio and its estimated long-term trend, is used as a basis for setting the countercyclical regulatory capital buffers under the Basel III regulatory framework. Using international data from the BIS, we show that the Basel credit gap, estimated by a one-sided HP filter, is nearly equivalent to a naive 16-quarter change in the credit-to-GDP ratio and performs equally well in terms of predicting banking crises. We demonstrate that the near-equivalence between deviations from trend and simple changes occurs when the one-sided HP filter is applied to an I(1) process.