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A structural model of capital buffer usability

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  • Lang, Jan Hannes
  • Menno, Dominik

Abstract

Under which conditions do usability constraints for regulatory capital buffers emerge? To answer this question, we build a non-linear structural banking sector model with a minimum capital requirement that banks are not allowed to breach, and a capital buffer requirement (CBR) that banks can breach but if they do so potential stigma applies. We prove that even very low stigma costs induce large buffer usability constraints, i.e. when faced with losses banks will deleverage significantly to avoid that their capital ratio falls below the CBR. Our findings imply that non-releasble regulatory capital buffers are unlikely to fully achieve their macro stabilisation goal to support aggregate loan supply when the banking system faces losses. JEL Classification: D21, E44, E51, G21, G28

Suggested Citation

  • Lang, Jan Hannes & Menno, Dominik, 2026. "A structural model of capital buffer usability," Working Paper Series 3188, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20263188
    Note: 2731285
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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • 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

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