Basel III uses the gap between the credit-to-GDP ratio and its long-term trend as a guide for setting countercyclical capital buffers. Criticism of this choice centers on three areas: (i) the suitability of the guide given the objective of the buffer; (ii) the early warning indicator properties of the guide for banking crises (especially for emerging market economies); and (iii) practical measurement problems. While many criticisms have merit, some misinterpret the objective of the instrument and the role of the indicator. Historically, for a large cross-section of countries and crisis episodes, the credit-to-GDP gap is a robust single indicator for the build-up of financial vulnerabilities. As such, its role is to inform, rather than dictate, supervisors’ judgmental decisions regarding the appropriate level of the countercyclical buffer. Basel III introduced a countercyclical capital buffer (CCB) aimed at strengthening banks’ defenses against the build-up of systemic vulnerabilities. The framework assigns the credit-to-GDP gap a prominent role as a guide for policymakers. The guide is intended to help frame the analysis of whether to activate or increase the required buffer and the communication of the related decisions. But the link between the credit-to-GDP gap and the capital buffer is not mechanical. Instead, the framework allows for policymakers’ judgment on how buffers are built up and released. Judgment, however, should complement quantitative analysis, which may also use indicators other than the credit-to-GDP gap, in managing the instrument. The framework envisages that authorities would refer to the common reference guide in communicating decisions (BCBS (2010)). The credit-to-GDP gap (“credit gap”) is defined as the difference between the credit-to-GDP ratio and its long-term trend. Borio and Lowe (2002, 2004) first documented its property as a very useful early warning indicator (EWI) for banking crises. Their finding has been subsequently confirmed for a broad array of countries and a long time span including the most recent crisis.