Countercyclical theory and practice February 14, 2013 at 6:20 am

The Swiss are imposing a 1% countercyclical buffer due to real estate market overheating. This is probably sensible. But it does come in the same week that I read

There is little evidence that the credit to GDP gap, the ratio of credit to GDP or credit growth are factors affecting the incidence of crises in OECD countries

In other words, the key factor that Basel III suggests should be used to determine whether to impose a countercyclical buffer is of no use as a crisis predictor. What is, pace Switzerland, is house price growth.

4 Responses to “Countercyclical theory and practice”

  1. very noticeable that in the PRA working paper on how they intend to set the countercyclical buffer, the Hodrick-Prescott-filtered-credit-GDP ratio gets very secondary status.

  2. I do wonder if banks may just choose to run with an additional slug of CT1 capital at all points in the cycle, to avoid the costs of actively managing part of the capital stack and giving equity investors more certainty. From a microprudential perspective that’s ok. Less so from a macro perspective. While we’re on this topic, it seems weird to me the cycle neutral countercyclical is set at 0%. Makes the tool asymmetrical?

  3. d2 – that’s perhaps because HP is terrible at the end of the data set…

  4. QM – I see your point, but I suspect it was more saleable in Basel that way, as it meant that countries that wished to avoid the whole issue, could.