Credit Cycle and Capital Buffers in Central America, Panama, and the Dominican Republic
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Summary:
Credit is key to support healthy and sustainable economic growth but excess aggregate credit growth can signal the build-up of imbalances and lead to systemic financial crisis. Hence, monitoring the credit cycle is key to identifying vulnerabilities, particularly in emerging markets, which tend to be more exposed to sudden external shocks and reversal in capital flows. We estimate the credit cycle in Central America, Panama, and the Dominican Republic and find that the creadit gap is a powerful predictor of systemic vulnerability in the region. We simulate the activation of the Basel III countercyclical capital buffers and discuss the macroprudential policy implications of the results, arguing that countercyclical macroprudential policies based on the credit gap could prove useful to enhance the resilience of the region’s financial sector but the activation of macroprudential instruments should also be informed by the development of other macrofinancial variables and by expert judgment.
Series:
Working Paper No. 2019/039
Subject:
Countercyclical capital buffers Credit Credit cycles Credit gaps Financial institutions Financial regulation and supervision Financial sector policy and analysis Money Nonperforming loans
English
Publication Date:
February 22, 2019
ISBN/ISSN:
9781484397992/1018-5941
Stock No:
WPIEA2019039
Pages:
28
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