A Note on the Implementation of the Countercyclical Capital Buffer in Italy

Abstract

This paper analyzes the challenges posed by the implementation of the countercyclical capital buffer framework in Italy and proposes ways of meeting them. In the first part of the analysis we review the limitations of the standardized Basel III credit-to-GDP gap; we then propose possible solutions, which while remaining in the spirit of Basel, can better capture the state of the credit cycle in real time. In the second part of the paper we propose a step by step approach for reducing the uncertainty that may arise when looking at the indicators which, in addition to the credit-to-GDP gap, are designed to help authorities take decisions about the buffer rate; we also analyze the relationship between the selected indicators and a continuous variable of banking system riskiness. While the analysis is conducted with reference to Italian data, the proposed analytical framework is applicable to any country.

Keywords: countercyclical capital buffer, financial cycle, credit cycle, macroprudential policy, capital requirements, banks, banking crises

JEL Classification: E32, G01, G21, G28