Title: Anchoring countercyclical capital buffers: The role of market liquidity
Authors: Minh Doan - Deakin University, Melbourne, AUstralia (Australia) [presenting]
Abstract: The aim is to develop a market illiquidity measure (MI) based on a floating lookback put option of the market portfolio for the build-up and release of capital buffers across financial cycles according to the countercyclical capital buffer (CCB) schemes of Basel III. We find that MI outperforms the credit-to-GDP ratio, a primary indicator recommended by the Basel Committee for Banking Supervision. We show that MI provides timely signals to accumulate capital buffers prior to a crisis and release them as a crisis unfolds. In contrast, the credit-to-GDP ratio generates reliable signals only in the build-up phase and only for large countries such as Germany, the UK and the US. Our findings suggest that MI can be useful as an anchor for CCB schemes especially for releasing capital buffers.