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A regime-switching approach to bank capital and liquidity buffers

Author

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  • Sharma, Krishan Kumar

Abstract

Stagflation - persistent inflation combined with stagnant growth - creates nonlinear feedback between credit and liquidity risks that standard regulatory models underestimate. This letter introduces a regime-switching vector autoregression (RS-VAR) framework that jointly captures state-dependent probabilities of default (PD), loss-given-default (LGD), and dual-outflow liquidity dynamics (deposit withdrawals plus credit-line drawdowns) during stagflationary episodes.

Suggested Citation

  • Sharma, Krishan Kumar, 2026. "A regime-switching approach to bank capital and liquidity buffers," Finance Research Letters, Elsevier, vol. 97(C).
    • Handle: RePEc:eee:finlet:v:97:y:2026:i:c:s1544612326003296
    DOI: 10.1016/j.frl.2026.109799
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis

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