Macroprudential policy is now based around a countercyclical buffer, relating capital
requirements for banks to the degree of excess credit in the economy. We consider the
construction of the credit to GDP gap looking at different ways of extracting the cyclical
indicator for excess credit. We compare different smoothing mechanisms for the credit
gap, and demonstrate that some countries require an AR(2) smoother whilst other do
not. We embed these different estimates of the credit gap in Logit models of financial
crises, and show that the AR(2) cycle is a much better contributor to their explanation
than is the HP filter suggested by the BIS and currently in use in policy making.Weshow
that our results are robust to changes in assumptions, and we make criticisms of current
policy settings