Setting Countercyclical Capital Buffers Based on Early Warning Models: Would it Work?

Systemic Early Warning Systems for Eu15 Based on the 2008 Crisis

“…Babecký et al (2013) studied EU and OECD countries, during the 1970-2010 period using panel VAR and model averaging techniques, and suggest that house and share prices, domestic and global variables warn of impending crises. A recent study by Behn et al (2013) analyzed 23-EU countries between 1982 and 2012 and built a model with macro, market and bank variables at the local and global levels. Lo Duca and Peltonen (2013) also test a model with domestic and public predictors and construct a financial stress index that identifies the beginning of crises.…”

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“…The category of potential overvaluation of property prices consists of variables that are most common in good early prediction of financial crises. Borio (2012), Jordá, Schularick and Taylor (2015), and Behn et al (2013), among others, find that overvaluation of property prices in combination with excessive credit growth is the best early warning signalling variable. The movements of loans in the economy and real estate prices are highly correlated.…”

Calibrating the Magnitude of the Countercyclical Capital Buffer Using Market‐Based Stress Tests

“…The first approach is based on early warning models of banking crises or the buildup of macroeconomic vulnerabilities; see, for example, Behn et al (2013), Anundsen et al (2016), Brave andLopez (2019), andTölö, Laakkonen, andKalatie (2018). The rationale is that indicators that perform well as an early warning signal are better suited to signal the need for the buffer as well as its release before a banking crisis occurs.…”