Principles and procedures of countercyclical capital buffers introduced by Basel III to fight financial crises

Since banking sector is exposed to systemic risks, it needs to be monitored, regulated, and supervised strictly. One of the most important regulations for banking sector is the Basel Standards. Basel I was published on 1988 with Basel II on 2004. After the 2008 global crisis, Basel II was found insufficient, which led to Basel III to be published on 2010. One of the new regulations of Basel III is countercyclical capital buffers. Countercyclical capital buffers help banks to accumulate extra capitals by pointing to presumptive crisis beforehand with different indicators. Moreover, it also aims to release these capitals to provide funds for banks once the economy enters a crisis period. Basel Committee suggests the credit-to-GDP gap for countercyclical capital buffers decisions. Credit-to-GDP gap is calculated as the difference of credit-to-GDP ratio from its long term trend which is calculated by one sided HP filter with the smoothing parameter of lambda being 400.000. In this study, the credit-to-GDP gap is analyzed for Turkey with data in the time span between 1988 and 2015 for different λ values. It was seen that the credit-to-GDP gap alone is not sufficient to explain past Turkish crises. Hence, some alternative indicators were also analyzed, namely BIST100 index, CDS spreads and bank profitability ratios. As a result of this study, it is found that the credit-to-GDP gap and BIST100 index are useful indicators for the accumulation of buffer by notifying crisis beforehand, with the CDS spreads and profitability ratios being useful indicators for the release of the buffer.