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.

Financial Crises, Macroprudential Policy and the Reliability of Credit-to-GDP Gaps

“…The evidence in Section 3 shows that the ex-post revisions to a credit-to-GDP gap obtained from one-side HP filter are about as large as the gap itself. In this respect, the results obtained by Edge and Meisenzahl (2011) and Alessandri et al (2015) respectively for the US and Italy extend easily to all developed and emerging economies included in our panel. We now demonstrate that -precisely because they are large and persistent -the one-side HP filtering errors are also relatively easy to forecast based on the past history of the revision.…”

“…To fix ideas, we define as F t|t the one-side (filter) estimate of the credit gap at time t, which is based on a time-t information set, and as S t|T the two-side (smoother) estimate of the same credit gap, which relies instead on information up to time T > t. 5 Smoother and filter diverge significantly inside the sample (S τ |T = F τ |t for τ = T ), but converge by construction at the end of the sample, where the hindsight advantage of the smoother disappears (lim t→T S t|T = F t|t ). The procedure proposed by Alessandri et al (2015) exploits the information contained in the history of the filter and the smoother to improve its performance at the t = T boundary. It can be summarized as follows:…”

Private debt overhang and the government spending multiplier: Evidence for the United States

“…In fact, when we use a one-sided HP filter to derive the trend, a major part of the 1930s turns out to be a low-debt period-that is, from 1933 onwards-which is at odds with common wisdom.The reason is that the one-sided HP filter identifies the deleveraging during the Great Depression as a low-debt state in real time, while debt levels were historically (ex post) relatively high. See also Edge and Meisenzahl (2011) and Alessandri, Bologna, Fiori, and Sette (2015) for evidence on the unreliability of credit-to-GDP ratios to measure debt overhang based on information in real time. 12 Note that his critiques mainly apply to the estimation of higher-frequency business cycles (e.g., the output gap).…”

Real and financial cycles: estimates using unobserved component models for the Italian economy

“…For the underlying methodology, we refer toAlessandri et al (2015). 14 This is mainly due to the fact that the volatility of ψ2,t (measured by the signal-to-noise ratio) is much higher than the volatility of ψ1,t.…”