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Introduction of the composite indicator of cyclical systemic risk in Croatia- possibilities and limitations

This research compares the advantages and shortfalls of different approaches to monitoring systemic risks that depend on the phase of the financial cycle of an economy. Decision-making and calibration of macroprudential policy instruments depend on many individual indicators, such as credit dynamics, overvaluation of real estate prices, external imbalances, and many others. That is why solutions in the form of composite indicators of cyclical systemic risk exist in practice. They summarize a lot of information in a form that is easier to monitor, communicate with the public and ultimately make decisions about the countercyclical capital buffer. Its calibration depends on the numerous aforementioned indicators that should reflect the accumulation of cyclical systemic risks in the economy. Since there has been no composite indicator of cyclical risks in Croatia so far, this research considers several popular approaches to constructing composite indicators of cyclical risks, specifically for the case of Croatia. The paper is comprehensive because it contrasts popular approaches in practice and comments on the possibilities of adjusting the calculation of indicators for the case of Croatia. Finally, several options for calibrating the countercyclical capital buffer are presented based on the selected best composite indicator.

systemic risk ; macroprudential policy ; countercyclical capital buffer ; composite indicators ; cyclical risks

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