Van Oordt, MaartenR.C. (2023). Calibrating the magnitude of the countercyclical capital buffer using market-based stress tests Journal of Money, Credit and Banking, 55(2-3):465--501.
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Affiliated author
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Publication year2023
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JournalJournal of Money, Credit and Banking
This paper proposes a novel methodology to calibrate the magnitude of the countercyclical capital buffer (CCyB) using market-based stress tests. The macroprudential authority in our paper aims to contain the possibility of a breach of a minimum capital ratio in the event of a severe system-wide shock within a certain permissible failure probability. We apply the methodology by stress-testing major banks in six advanced economies on a quarterly basis over a period of 27 years. The estimates suggest that the cap on the CCyB should not be less than around 1.7% of total assets. Its potential normal-times level is estimated at approximately 0.8% of total assets.