Applicability of Basel III Countercyclical Capital Buffer Guidance to Emerging Market Economies: An Exploration

Abstract

Basel Committee on Banking Supervision (BCBS) has published its guidance for operating the countercyclical capital buffer. It has, inter alia, recommended that credit-to-GDP ratio could be the buffer guide. This paper argues that BCBS buffer guide is not suitable for Emerging Market Economies (EMEs) for variety of reasons and showcases an alternative buffer guide, reflecting their underlying banking business model. It verifies the historical performance of the alternative buffer guide in the Indian context and finds evidence – supported by the corroborative behaviour of the real sector and asset markets - that the alternative guide tracks credit cycles in India better. The paper demonstrates that the alternative indicator does not adversely impact the structural drivers of credit growth. Accordingly, the paper recommends the alternative countercyclical capital buffer guidance with triggers for the build-up and release of the additional countercyclical capital buffer.