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

A negative capital buffer shock leads to a modest decline in output and prices and to a larger decline in bank lending growth (see Chart 3). The source of this shock could be an increase in capital requirements (e.g. the CCyB) that increases the target economic capital ratio of the banks.^[11^] As a result, the banks adjust their balance sheets (lending) in order for the actual capital ratio to converge to the target in the future. Indeed, the cumulative decline in corporate lending nine quarters after the shock (when the trough is reached) ranges from 0.4 percentage points in Germany to 2.6 percentage points in Italy and, for mortgage lending, from 0.5 to 3.6 percentage points, respectively. The impact on bank lending spreads peaks at three quarters after the shock but is very small or insignificant (smaller than 0.1 percentage points in all of the countries). The curtailing of lending has macroeconomic implications. The estimated cumulative impact on real GDP growth over nine quarters is very small in Germany (-0.07 percentage points), while it is strongest in Italy (-0.9 percentage points).
Chart 3
Dynamic responses of endogenous variables to a one standard deviation shock to economic bank capital buffers

Notes: The impulse response functions (IRFs) are estimated based on a panel Bayesian VAR model identified with contemporaneous restrictions. Cumulative impulse response functions are reported for real GDP growth, inflation and bank lending growth. All the variables are defined in percentage points. The median of the accepted draws is plotted together with the 32% and 68% Bayesian credibility bands.
5 Conclusion
There is little empirical evidence on how shocks to bank capital buffers affect the banking sector and the macroeconomy in the euro area. We fill in this gap by computing a measure of economic bank capital buffer at the country level for the four largest euro area countries. We find that shocks to economic bank capital buffers affect bank lending and also real GDP growth in these countries. These findings are important for the calibration and assessment of capital-based macroprudential policy measures, which are likely to affect the target capital ratio. In the case of policies which are countercyclical in nature, these results suggest that they could be useful for limiting the procyclicality and excessive amplification of the financial cycle, on top of helping to build resilience in the banking sector.