The benefits and costs of adjusting bank capitalisation: evidence from euro area countries

Katarzyna Budnik (), Gaia Barbic (), Giulio Nicoletti (), Massimiliano Affinito, Fabrizio Venditti, Saiffedine Ben Hadj (), Hans Dewachter, Edouard Chretien (), Clara Gonzalez, Javier Mencía (), Jenny Hu, Jairo Rivera-Rozo (), Lauri Jantunen, Otso Manninen, Ramona Jimborean, Ricardo Martinho (), Ana Regina Pereira, Elena Mousarri (), Constantinos Trikoupis (), Laurynas Naruševicius (), Michael O’Grady, Sofia Velasco () and Selcuk Ozsahin
Additional contact information
Gaia Barbic: European Central Bank
Giulio Nicoletti: European Central Bank
Saiffedine Ben Hadj: Banque Nationale de Belgique/Nationale Bank van België
Edouard Chretien: Autorité de contrôle prudentiel et de résolution
Javier Mencía: Banco de España
Jenny Hu: De Nederlandsche Bank
Jairo Rivera-Rozo: De Nederlandsche Bank
Lauri Jantunen: Suomen Panki
Otso Manninen: Suomen Panki
Ricardo Martinho: Banco de Portugal
Ana Regina Pereira: Banco de Portugal
Elena Mousarri: Central Bank of Cyprus
Constantinos Trikoupis: Central Bank of Cyprus
Laurynas Naruševicius: Lietuvos Bankas
Michael O’Grady: Central Bank of Ireland
Sofia Velasco: Central Bank of Ireland
Selcuk Ozsahin: Banca Slovenije

No 1923, Working Papers from Banco de España

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 fullyfledged 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.

Keywords: FAVAR; capital regulation; cost-benefit analysis; banking system resilience (search for similar items in EconPapers)
JEL-codes: E51 G21 G28 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2019-07
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: The benefits and costs of adjusting bank capitalisation: evidence from euro area countries (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1923

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