The macroeconomic impact of changes in economic bank capital buffers Prepared by Derrick Kanngiesser, Reiner Martin, Diego Moccero and Laurent Maurin

6 References
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1. 
   See, for example, Babić and Fahr (2019) and Darracq Pariès et al. (2019).
   
2. 
   An insufficient number of observations makes it difficult to conduct this analysis for smaller euro area countries with a smaller number of banks.
   
3. 
   These authors find that a one percentage point increase in capital requirements leads to an increase of 0.65 percentage points in the target capital ratio.
   
4. 
   The requirements were always equal or greater than the Basel minimum of 8% and reflected supervisory judgments about risks not captured in the Basel capital framework, including the quality of bank management, corporate governance and systems and controls.
   
5. 
   As a result, target economic capital ratios are different from capital requirements, although the latter can affect the target capital ratio, as mentioned before.
   
6. 
   The use of partial adjustment models is standard in the literature. See Hancock et al. (1995), Berrospide and Edge (2010), Stolz and Wedow (2011) and Mésonnier and Stevanovic (2017).
   
7. 
   Size is argued to capture complexity and agency problems. Profits capture the ability of banks to generate internal capital, and stock market volatility captures bank’s riskiness. See Gropp and Heider (2008) and Brewer et al. (2008).
   
8. 
   Estimates are implemented using the BEAR Toolbox. The technique allows for country-specific coefficients, enabling differentiation of the impact of shocks across countries, and is identified via contemporaneous restrictions.
   
9. 
   The monetary policy rate is the EONIA rate. Economic activity and inflation are the quarter-on-quarter growth rates of real GDP and headline inflation respectively. Bank lending is computed as the quarter-on-quarter growth rate of an index of notional stocks. Finally, bank lending spreads are the difference between interest rates on new business loans and the monetary policy rate.
   
10. 
    Budnik et al. (2019) develop a macroprudential stress test for 91 institutions located in 19 euro area countries, lifting the static balance sheet assumption of supervisory stress test and allowing for a feedback loop to the macroeconomy. The authors find that banks deleverage in order to meet capital requirements in an adverse scenario.
    
11. 
    The economic capital buffer may also change for other reasons, for example, due to a decline in the actual capital ratio. In this case, the impact may be even stronger if the actual capital ratio falls below regulatory requirements, because this breach may trigger automatic restrictions on distribution of even liquidation.