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Title: Basel III and the prediction of financial crises Authors:  Simon van Norden - HEC Montreal (Canada) [presenting]
Marc Wildi - Zurich University (Switzerland)
Abstract: Basel III allows national regulators to adjust the minimum level of reserves held by financial institutions in response to changing perceptions of the fragility of the financial system. This requires regulators to forecast potential systemic financial crises. The extent to which this is feasible is the subject of considerable controversy, not least because of its international importance to current banking regulation. The aim is to contribute to this debate by examining the extent to which regulators' preferred variables can usefully forecast systemic banking crises.We make two original contributions. First, we study how aspects of existing real-time measures of credit cycles affect the predictability of systemic banking crises. We show that simple theory-based modifications to filtering measures recently mandated by regulators can have an important effect on predictive power. We then study the performance of alternatives based on optimal filter designs. We discuss the results in light of the current debate over the expected performance of credit cycles as guide for Countercyclical Capital Buffers.