Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/193589
Authors: 
Pfeifer, Lukáš
Hodula, Martin
Year of Publication: 
2018
Series/Report no.: 
ESRB Working Paper Series 82
Abstract: 
Over the last few years, national macroprudential authorities have developed different strategies for setting the countercyclical capital buffer (CCyB) rate in the banking sector. The existing approaches are based on various indicators used to identify the current phase of the financial cycle. However, to our knowledge, there is no approach that directly takes into consideration banks' prudential behavior over the financial cycle as well as cyclical risks in the banking sector. In this paper, we propose a new profit-to-provisioning approach that can be used in the macroprudential decision-making process. We construct a new set of indicators that largely capture the risk of cyclicality of profit and loan loss provisions. We argue that banks should conserve a portion of the cyclically overestimated profit (non-materialized expected loss) in their capital during a financial boom. We evaluate the performance of our newly proposed indicators using two econometric exercises. Overall, they exhibit good statistical properties, are relevant to the CCyB decision-making process, and may contribute to a more precise assessment of both systemic risk accumulation and risk materialization. We believe that the relevance of the profit-to-provisioning approach and the related set of newly proposed indicators increases under IFRS 9.
Subjects: 
Financial stability
macroprudential policy
countercyclical capital buffer
profit-to-provisioning approach
banking prudence indicators
JEL: 
E58
G21
G28
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-049-8
Document Type: 
Working Paper
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