IMF Working Papers

Credit Cycle and Capital Buffers in Central America, Panama, and the Dominican Republic

By Valentina Flamini, Pierluigi Bologna, Fabio Di Vittorio, Rasool Zandvakil

February 22, 2019

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Valentina Flamini, Pierluigi Bologna, Fabio Di Vittorio, and Rasool Zandvakil. Credit Cycle and Capital Buffers in Central America, Panama, and the Dominican Republic, (USA: International Monetary Fund, 2019) accessed December 22, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Countercyclical capital buffers, Credit, Credit cycles, Credit gaps, Financial institutions, Financial regulation and supervision, Financial sector policy and analysis, Money, Nonperforming loans

Keywords: Basel III, CAPDR country, Countercyclical capital buffer, Countercyclical capital buffers, Credit, Credit condition, Credit cycle, Credit cycles, Credit cycles of the CAPDR country, Credit deepening, Credit development, Credit dollarization, Credit gap, Credit gaps, Credit growth, Credit series, Credit-to-GDP gap, Financial crises, GFC credit growth, Global, Growth environment, Nonperforming loans, Similarity indexes of the CAPDR credit cycle, WP

Publication Details

  • Pages:

    28

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2019/039

  • Stock No:

    WPIEA2019039

  • ISBN:

    9781484397992

  • ISSN:

    1018-5941

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