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The Impact of Capital Requirements on the Macroeconomy: Lessons from Four Macroeconomic Models of the Euro Area

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  • Matthieu Darracq Paries

    (European Central Bank)

  • Peter Karadi

    (European Central Bank)

  • Christoffer Kok

    (European Central Bank)

  • Kalin Nikolov

    (European Central Bank)

Abstract

This paper examines the impact of higher bank capital requirements on the real economy. We find, using a range of macroeconomic models used at the European Central Bank, that, in the long run, a 1 percent bank capital requirement increase has a small impact on real activity. In the short run, GDP declines by 0.15 to 0.35 percent. When banks are able to reduce their voluntary capital buffers and dividend payouts and when monetary policy reacts strongly to inflation deviations from target, the real impact of higher capital requirements is significantly reduced.

Suggested Citation

  • Matthieu Darracq Paries & Peter Karadi & Christoffer Kok & Kalin Nikolov, 2022. "The Impact of Capital Requirements on the Macroeconomy: Lessons from Four Macroeconomic Models of the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 18(5), pages 1-50, December.
    • Handle: RePEc:ijc:ijcjou:y:2022:q:5:a:5
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    1. Beaupain, Renaud & Braouezec, Yann, 2024. "International banking regulation and Tier 1 capital ratios. On the robustness of the critical average risk weight framework," International Review of Financial Analysis, Elsevier, vol. 91(C).

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    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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