Basel III uses the gap between the credit-to-GDP ratio and its long-term trend as a guide for setting countercyclical capital buffers. Criticism of this choice centres on three areas: (i) the suitability of the guide given the objective of the buffer; (ii) the early warning indicator properties...

Prudential tools that target financial stability need to be calibrated at the level of the financial system but implemented at the level of each regulated institution. They require a methodology for the allocation of system-wide risk to the individual institution in line with its systemic...

Historically, unusually strong increases in credit and asset prices have tended to precede banking crises. Could the current crisis have been anticipated by exploiting this relationship? We explore this question by assessing the out-of-sample performance of leading indicators of banking system...

How do conditions in the financial sector affect the macroeconomy? We summarise the common variation in a large array of financial variables into a small set of statistical factors and examine the information content of these factors when forecasting GDP and inflation in four economies. We find...

Despite their importance in macroeconomic and financial stability analysis, residential property data are not easily available on a comparable basis. The BIS currently publishes more than 300 price series for 55 countries, among which it has selected one representative series for each country....

The returns on bank stocks rise and fall with the business cycle, making bank equity financing cheaper in the boom and dearer during a recession. This provides support for prudential tools that give incentives for banks to build capital buffers at times when the cost of equity is lower. In...

A measure of risk premium is derived from the comparison of spot and option prices across the US equity and eurodollar markets. Risk premia in both markets co-move with volatility risk. Option prices, however, seem to underreact to changes in return volatility forecasts.

Style analysis shows that as market conditions change so do the investment strategies of hedge funds. It also provides a simple indicator of hedge fund leverage that varies over time. The indicator suggests that leverage tended to be high in 1997-98 but lower more recently.

House prices generally depend on inflation, the yield curve and bank credit, but national differences in the mortgage markets also matter. House prices are more sensitive to short-term rates where floating rate mortgages are more widely used and more aggressive lending practices are associated...

Up to a point, banks and markets both foster economic growth. Beyond that limit, expanded bank lending or market-based financing no longer adds to real growth. But when it comes to moderating business cycle fluctuations, banks and markets differ considerably in their effects. In normal...