From losses to buffer - calibrating the positive neutral CCyB rate in the euro area

We study the impact of cyclical systemic risks on banks’ profitability in the euro area within a panel quantile regression model, with the ultimate goal to inform the calibration of the Countercyclical Capital buffer (CCyB). Compared to previous studies, we augment our model to control for unobserved bank-specific characteristics and year-fixed effects and find a lower degree of heterogeneity in the estimated effects across the conditional distribution of bank returns on assets. We propose a simple yet intuitive framework to calibrate the CCyB through the cycle, including the socalled "positive neutral" rate. The model suggests a target positive neutral rate for the euro area ranging from 1.1% to 1.8%. Furthermore, the calibrated CCyB rates are consistent with the evolution of domestic cyclical systemic risks in the countries considered. The results further show that the adoption of a positive neutral CCyB approach allows for an earlier and more gradual build-up of the buffer, but does not lead to higher CCyB requirements at the peak of the cycle. Importantly, a positive neutral CCyB strategy would have implied that most euro area countries would have had a positive CCyB in place at the onset of the COVID-19 pandemic. JEL Classification: E52, G11, G23