A Multiplicative Model of Countercyclical Capital Buffer Evaluation Differentiated by Homogeneous Clusters of Countries

Abstract

The Basel Committee introduced countercyclical capital buffers in order to mitigate the effects of bank capital procyclicality, which is to say the decrease in the capital adequacy of banks in economic downturns. The ratio of loans to GDP was taken as the proxy for the economic cycle signaling variable. Nevertheless, Repullo and Saurina (2011) have proven that the credit-to-GDP ratio is not as accurate at predicting the stage of economic cycle as the GDP growth rate. They proposed a theoretical framework for capital buffer calculations based on GDP growth rate dynamics.We extend the countercyclical capital buffer analysis in two directions. First, empirical criteria to implement Repullo and Saurina’s model are proposed and justified. Second, the countercyclical capital buffer parameter, is then differentiated according to clusters of countries that display homogeneous patterns of macroeconomic variables dynamics. Lastly, the countercyclical capital buffers based on the Basel Committee’s approach and on the Repullo and Saurina model are then compared.