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Torsten Wezel

, notably applying a lower smoothing factor and normalizing the credit gap to a country’s credit-to-GDP level. This is done to accommodate the many volatile economies in the sample. The Basel gap is likely to work fine in a restricted sample containing more mature economies, but such a small sample would not lend itself to regression analysis here. Another contribution of the paper is to reexamine the BCBS buffer guide using different thresholds for minimum and maximum gaps/CCB sizes, as policymakers may have different preferences for avoiding insufficient buffers

Torsten Wezel
This paper discusses issues in calibrating the countercyclical capital buffer (CCB) based on a sample of EU countries. It argues that the main indicator for buffer decisions under the Basel III framework, the credit-to-GDP gap, does not always work best in terms of covering bank loan losses that go beyond what could be expected from economic downturns. Instead, in the case of countries with short financial cycles and/or low financial deepening such as transition and developing economies, the Basel gap is shown to work best when computed with a low, smoothing factor and adjusted for the degree of financial deepening. The paper also analyzes issues in calibrating an appropriate size of the CCB and, using a loss function approach, points to a tradeoff between stability of the buffer size and cost efficiency considerations.
International Monetary Fund. African Dept.

deviate from the pure BCBS buffer guide and consider other indicators for setting the CCB such as asset prices or financial sector conditions more broadly. As Seychelles adopts Basel III capital definition, the FCI could serve as one of the other indicators for setting CCB. 26. Given its GDP forecasting qualities, we assess whether the FCI performs well as predictor for credit boom-bust episodes . Specifically, we check whether the FCI can help predict more accurately unsustainable credit boom conditions that are followed by downturns than the credit-to-GDP gap. Such

International Monetary Fund. African Dept.

years (see Figure 4 ). 13 Several country authorities deviate from the pure BCBS buffer guide and consider other indicators for setting the CCB such as asset prices or financial sector conditions more broadly. Figure 4. Mauritius: FCI, Credit Gap, and Credit Growth, 2004–18 (In percent) Sources: Bank of Mauritius, Statistics Mauritius, and IMF staff estimates. 29. Given its predictive power for economic growth, FCI’s performance as a predictor for boom-bust episodes is assessed . Specifically, we check whether the FCI can forecast more accurately

Zineddine Alla, Mr. Raphael A Espinoza, Qiaoluan H. Li, and Miguel A. Segoviano
We present a novel approach that incorporates individual entity stress testing and losses from systemic risk effects (SE losses) into macroprudential stress testing. SE losses are measured using a reduced-form model to value financial entity assets, conditional on macroeconomic stress and the distress of other entities in the system. This valuation is made possible by a multivariate density which characterizes the asset values of the financial entities making up the system. In this paper this density is estimated using CIMDO, a statistical approach, which infers densities that are consistent with entities’ probabilities of default, which in this case are estimated using market-based data. Hence, SE losses capture the effects of interconnectedness structures that are consistent with markets’ perceptions of risk. We then show how SE losses can be decomposed into the likelihood of distress and the magnitude of losses, thereby quantifying the contribution of specific entities to systemic contagion. To illustrate the approach, we quantify SE losses due to Lehman Brothers’ default.
Zineddine Alla, Mr. Raphael A Espinoza, Qiaoluan H. Li, and Miguel A. Segoviano

. 27 This guide was based on an analysis that showed that a credit-to-GDP ratio of 10 percentage points or more above trend issues the strongest signal of an impending crisis (in terms of noise-to-signal ratio). Per the BCBS buffer guide formula, when the credit gap breaches a “lower threshold” of 2 percent, a decision to start increasing the buffer could be merited if surveillance supports the judgment that systemic risk may be building up; and, when it reaches the “upper threshold” of 10 percent, the CCyB should be set at 2.5 percent of RWA. It can also be set

International Monetary Fund. African Dept.
This Selected Issues paper develops a Financial Conditions Index (FCI) for Mauritius—an instrument to gauge the operational state of the financial sector and predict real economy activity. The evolution of Mauritius’ financial services sector has been supported by a vibrant offshore corporate sector. Given the strong macro-financial linkages, it is imperative to closely monitor domestic financial developments. Financial developments are broader than monetary developments depicting money supply and interest rates. The FCI is a robust predictor of real GDP growth in Mauritius. The FCI can also help inform macroprudential policy decisions. Decisions on setting the countercyclical capital buffer of Basel III could be informed by analyzing developments in the FCI. As historically Mauritius has not experienced drastic swings in financial credit, testing the constructed FCIs for predicting boom-bust episodes is difficult. Nevertheless, the FCI signaled lax financial conditions in 2009 and again in 2012 that likely contributed to accelerated credit growth in 2012–2013 and a subsequent acceleration in nonperforming loans during 2014–2016.
Ron Anderson, Jon Danielsson, Chikako Baba, Mr. Udaibir S Das, Mr. Heedon Kang, and Miguel A. Segoviano

based on the aggregate private sector credit-to-GDP gap ( BCBS 2010 ). This guide was based on an analysis that showed that a credit-to-GDP ratio of 10 percentage points or more above trend issues the strongest signal of an impending crisis (in terms of noise-to-signal ratio). According to the BCBS buffer guide formula, when the credit gap breaches a “lower threshold” of 2 percent, a decision to start increasing the buffer could be merited, if surveillance supports the judgment that systemic risk may be building up, and when it reaches the “upper threshold” of 10