Estimating the impact of shocks to bank capital ratios is important for calibrating and assessing macroprudential policies. The idea behind countercyclical capital buffers, in particular, is to impose a capital surcharge on banks in order to limit the excessive amplification of credit cycles and to incentivise banks to build up capital so that they are better prepared to withstand losses in an economic downturn. This leads to the questions of whether, and to what extent, changes in capital ratios affect bank lending, lending spreads and the broader macroeconomy. Answering these questions is not straightforward, given that capital ratios are endogenously determined and influenced by various factors including demand conditions, as well as by discretionary changes in policy (e.g. monetary policy, supervisory actions, etc.). Furthermore, the empirical evidence with the macroprudential use of CCyBs in the euro area is still relatively limited.[1]
This article estimates the impact of shocks to economic bank capital buffers on banking and macroeconomic variables in four large euro area countries (Germany, Spain, France and Italy).[2] As mentioned before, the limited use of the CCyB in euro area countries prevents the implementation of a proper time series econometric analysis to test its impact on bank lending and the economy. However, one can estimate the impact of changes in capital ratios based on the notion of the target economic capital ratio, i.e. the capital ratio that a bank would like to hold considering its own characteristics (size, profitability, risk aversion of its creditors, risk exposure, etc.) and macroeconomic conditions (expected GDP growth, etc.). The target economic capital can also be affected by capital requirements, as found for the United Kingdom by Francis and Osborn (2009).[3] Unfortunately, such series are available only over a very short period of time for the countries and banks under consideration, hence preventing its use in time series econometric analysis. In turn, an economic bank capital buffer can be computed as the difference between the actual and the target level of the economic capital ratio. In particular, we follow Mésonnier and Stevanovic (2017) and compute economic bank capital buffers for large stock-exchange listed euro area banks. Next, country-level aggregates are computed as a weighted average of the bank-level buffers. When economic capital buffers are positive and large, banks have room to finance the economy. However, when economic capital buffers are negative, banks may need to curtail lending and/or increase the pricing of loans for actual capital ratios to reach the target in the future. Country-level buffers are then included in a vector auto regressive (VAR) model, together with other macroeconomic (policy interest rate, growth in economic activity and rate of inflation) and banking sector variables (growth rates of bank lending to households and non-financial corporations and bank lending spreads) in order to identify the effects of exogenous changes in these capital buffers. The idea is that changes in economic capital buffers mimic the effects a change in regulatory capital requirements would have on the economy.
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