This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.

The financial crisis has demonstrated the need for a set of macroprudential policy tools that can be used to mitigate systemic risk. Focusing on the UK, our paper reviews the performance of the Basel III credit-to-GDP gap that, alongside judgement, is to be used as a reference guide in setting the countercyclical capital buffer. We find that this measure worked well in providing an advance signal of past UK episodes of banking system distress. But this does not guarantee future signalling success. We therefore evaluate some conceptual shortcomings of the credit gap and suggest complementary indicators. viewed as complementary: we discuss a subset of the indicators in Bank of England (2013) in more detail with a focus on indicators for which we have long time series available. We take the credit-to-GDP gap as a starting point, arguing that the gap as defined by the BCBS worked well in providing an advance signal of past UK crises. This is despite us using a real-time measure (see Edge and Meisenzahl (2011) for a contrasting discussion of this issue).But, as noted in Bank of England (2013), no single indicator can ever provide a perfect guide to systemic risks or the appropriate policy responses, given the complexity of financial interlinkages, the tendency for the financial system to evolve over time and time lags before risks become apparent. Policymakers will also need to monitor a wide and time-varying set of indicators, depending on the emerging risks. In this paper, we therefore discuss additional indicators that might complement the credit-to-GDP gap, both in the context of having been useful in past crises in the UK and elsewhere and in helping to address some of the credit-to-GDP gap's conceptual shortcomings. In particular, we argue that the sources and quality of credit are important, suggesting the need not only for an aggregate capital tool such as the countercyclical capital buffer but also sectoral tools such as sectoral capital requirements. Finally, we discuss indicators that might help determine when to release the capital buffers.In discussing other indicators, we take guidance from the literature on the basis of cross-country analyses (e.g. Kaminsky and Reinhart (1999); Drehmann et al. (2010); Drehmann et al. (2011); Borio and Lowe (2002, 2004) and Barrell et al. (2010)). Cross-country studies have the obvious advantage of relying on more observations that gives more rigour to understanding the indicators that have tended to signal banking crises in the past. However, they also have drawbacks. For example, there may be little gained by including countries with different institutional arrangements and financial structures in the same panel analysis. Moreover, data definitions may not be homogeneous across countries and time series employed in panel approaches tend to be limited. By taking the lessons from the cross-country literature but focusing on the UK only for our own analysis, we have the advantage of being less limited by data availability, can focus more closely on individual series and...

This paper compares and contrasts the resilience of the financial system, in particular banks, during the Global Financial Crisis and COVID-19. We show that banks are now part of the solution, rather than part of the problem, thanks to regulatory and institutional reforms over the past decade. Heeding the lessons from the Global Financial Crisis has paid dividends. We outline some early lessons from the COVID-19 crisis for the financial system going forward.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may Abstract:Empirical evidence on the expectations hypothesis of the term structure is in-conclusive and its validity widely debated. Using a cointegrated VAR model of US treasury yields, this paper extends a common approach to test the theory. If, as we find, spreads between two yields are non-stationary, the expectations hypothesis fails. However, we present evidence that differences between two spreads are stationary. This suggests that the curvature of the yield curve may be a more meaningful indicator of expected future interest rates than the slope. Furthermore, we characterise level and slope by deriving the common trends inherent in the cointegrated VAR, and establish feedback patterns between them and the macroeconomy. JEL: C32, E43, E44

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