When and at What Level? Calibration of the Countercyclical Capital Buffer Using Early Warning Models

In this paper, we develop a measure of systemic risk based on an ensemble of early warning models that allows the simultaneous indication of both the timing and the level of the countercyclical capital buffer (CCyB), including its positive neutral level (CCyB PN ). The risk measure is the reverse-engineered capital ratio that prevents crisis signals. It effectively predicts crisis episodes across most countries studied. We found that an adequate level of the CCyB often substantially surpasses the implicit limit of 2.5%. The CCyB PN was found to be in the range of 1.5–3%. This methodology is universally applicable to countries that have not experienced banking crises.