Mind the Basel gap

Petri Jylhä, Matthijs Lof*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

1 Citation (Scopus)
48 Downloads (Pure)

Abstract

The Basel credit gap, the difference between a country's credit-to-GDP ratio and its estimated long-term trend, is used as a basis for setting countercyclical capital buffers under the Basel III regulatory framework. Using international data from the BIS, we show that the Basel credit gap, estimated by a one-sided HP filter, is nearly equivalent to a naive 16-quarter change in the credit-to-GDP ratio and performs equally well in terms of predicting banking crises. We demonstrate that the near-equivalence between deviations from trend and simple changes occurs when the one-sided HP filter is applied to a unit-root process. The goal of this paper is not to evaluate the performance of the Basel credit gap as an early-warning-indicator, but rather to demonstrate that its estimation method is unnecessarily complicated.

Original languageEnglish
Article number101605
Number of pages17
JournalJOURNAL OF INTERNATIONAL FINANCIAL MARKETS, INSTITUTIONS AND MONEY
Volume79
Early online date26 Jun 2022
DOIs
Publication statusPublished - Jul 2022
MoE publication typeA1 Journal article-refereed

Keywords

  • Credit gap
  • One-sided Hodrick–Prescott filter
  • Systemic risk

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