Evaluating Indicators for Use in Setting the Countercyclical Capital Buffer
by Eero Tölö, Helinä Laakkonen, and Simo Kalatie
Bank of Finland
The European Systemic Risk Board (ESRB) recently issued a recommendation on the use of early warning indicators in
macroprudential decisions involving the countercyclical capital buffer (Basel III framework). In addition to a primary
indicator, deviation in the credit-to-GDP ratio from long-term trend, the ESRB advises the use of supplemental indicators to
measure private-sector credit developments and debt burden, overvaluation of property prices, external imbalances, mispricing
of risk, and strength of bank balance sheets. Based on empirical analysis of data for European Union countries, a
large assortment of potential indicators, and comprehensive robustness checks, we propose specific suitable early warning
indicators for each of the six risk categories set forth by the ESRB.
JEL Code: G01, G28.
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