Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/208295
Authors: 
Budnik, Katarzyna
Affinito, Massimiliano
Barbic, Gaia
Ben Hadj, Saiffedine
Chretien, Edouard
Dewachter, Hans
González, Clara I.
Hu, Jenny
Jantunen, Lauri
Jimborean, Ramona
Manninen, Otso
Martinho, Ricardo
Mencía, Javier
Mousarri, Elena
Naruševičius, Laurynas
Nicoletti, Giulio
O'Grady, Michael
Ozsahin, Selcuk
Pereira, Ana Regina
Rivera-Rozo, Jairo
Trikoupis, Constantinos
Venditti, Fabrizio
Velasco, Sofia
Year of Publication: 
2019
Series/Report no.: 
ECB Working Paper No. 2261
Abstract: 
The paper proposes a framework for assessing the impact of system-wide and bank-level capital buffers. The assessment rests on a factor-augmented vector autoregression (FAVAR) model that relates individual bank adjustments to macroeconomic dynamics. We estimate FAVAR models individually for eleven euro area economies and identify structural shocks, which allow us to diagnose key vulnerabilities of national banking systems and estimate short-run economic costs of increasing banks' capitalisation. On this basis, we run a fully-fledged cost-benefit assessment of an increase in capital buffers. The benefits are related to an increase in bank resilience to adverse shocks. Higher capitalisation allows banks to withstand negative shocks and moderates the reduction of credit to the real economy that ensues in adverse circumstances. The costs relate to transitory credit and output losses that are assessed both on an aggregate and bank level. An increase in capital ratios is shown to have a sharply different impact on credit and economic activity depending on the way banks adjust, i.e. via changes in assets or equity.
Subjects: 
FAVAR
capital regulation
cost-benefit analysis
banking system resilience
JEL: 
E51
G21
G28
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-3523-4
Document Type: 
Working Paper

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