BIS Credit Gaps
Credit gaps are calculated by the BIS quarterly for the purpose of monitoring the growth in credit relative to the size of each countries economy. Excessively high credit growth is considered an indicator of increasing latent risk in bank lending. Periods of high credit growth are used to add extra capital to country banking systems through a mechanism called the Counter Cyclical Capital Buffer (CCyB). In some countries credit gaps in excess of 2% through to 10% are used to increment the capital requirements of lenders.
The credit gap is calculated as the detrended excess of credit to GDP:
where:
is the Hoderick Prescott trend filter with smoothing parameter of 400,000; - Credit is the total nominal credit to the private non-financial sector of each country, credit series capture total borrowing by the private non-financial sector (ie households and non-financial corporations) from all domestic and foreign sources, covering both bank and non-bank financing;
- GDP is the Nominal Gross Domestic Product (current prices).
The following chart shows that almost all countries have a negative credit gap, as a result of widespread slow down in credit growth with recent high interest rates. Prior to the current contraction, credit growth was widely stronger than trend across many countries due to the combination of low interest rates and debt financed government fiscal stimulus.
The data is current to
References: