An Estimation of Financial Cycle to Determine Counter Cyclical Capital Buffer1

The Basel III Countercyclical Capital Buffer framework has been designed to increase the resilience of the banking sector in periods of upturns in the financial cycle. The main idea is to control banking systems procycical properties which reiterates amplifies risk perception during both in times of distress and buoyant economic activity. Moreover, create a buffer to serve as a shock absorber during downturns. Basel Committee on Banking Supervision’s this regulatory standard built itself on five principles where two of them is related to the estimation of financial cycle. In addition, according to this estimated cycle, a regulatory rule is to be introduced. This study describes the estimation of financial cycle to determine counter cyclical capital buffer for Turkey and tries to build on this methodology by proposing an alternative financial condition index