Original Research

Filter selection for countercyclical capital buffers

Dirk Visser, Gary van Vuuren
South African Journal of Economic and Management Sciences | Vol 21, No 1 | a1744 | DOI: https://doi.org/10.4102/sajems.v21i1.1744 | © 2018 Dirk Visser, Gary Van Vuuren | This work is licensed under CC Attribution 4.0
Submitted: 09 January 2017 | Published: 12 April 2018

About the author(s)

Dirk Visser, Department of Risk Management, School of Economics, North-West University, South Africa
Gary van Vuuren, Department of Risk Management, School of Economics, North-West University, South Africa


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Abstract

Background: Procyclicality plays a pivotal role in finance in both thriving and crisis periods. This influence stems not only from the way market participants behave but also from risk metrics used and regulatory capital amassed and released during bust and boom periods, respectively. The introduction of the regulatory Countercyclical Capital Buffer aims to thwart procyclicality by accumulating (releasing) capital in upswings (downswings), subsequently reducing the amplitude of the financial cycle and promoting macroprudential stability. The timing of the accumulation and release of buffer capital is critical so identifying accurate indicators is important.

 

Aim: This paper applies a Kalman filter to South African data and confirms the procyclicality of the Basel Committee on Banking Supervision (BCBS) proposal.

 

Setting: For South Africa, studies suggest alternatives such as residential property indices because research has demonstrated that the BCBS proposal is procyclical rather than countercyclical.

 

Methods: This paper applies a Kalman filter to South African data and compares the results obtained with those filtered using the Hodrick–Prescott filter.

 

Results: Results indicate that buffer signals are dependent upon the filter employed.

 

Conclusion: Buffer signals are strongly dependent upon the filter employed to detect procyclicality. The South African Reserve Bank and other regulators should reconsider the use of the Hodrick–Prescott filter and entertain the possibility of using the Kalman filter instead.


Keywords

procyclicality; countercyclical capital buffer; Kalman filter

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