This paper uses two approaches to identify the thresholds needed to account for the credit-to-GDP gap currently used by the Banca d'Italia (an adjusted credit-to-GDP gap) in the process of setting the countercyclical capital buffer (CCyB).
The two approaches suggest activating the CCyB when the adjusted gap reaches, respectively, 1 and 3 percentage points, and increasing the buffer until it reaches 2.5 per cent when the gap is, respectively, at 9 and 8 percentage points. Based on the estimates, the use of the pair (1,9) should allow us to maximize the accuracy in forecasting the vulnerability of the banking system. In any case, the setting of the CCyB is not mechanical as, in addition to the credit-to-GDP gap, it considers a large set of macro-financial cycle indicators.
