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Balancing acts: policymakers' choices between bank resilience and economic growth

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  • Diana Lima
  • Duarte Maia
  • Rita Basto

Abstract

We discuss the implications of macroprudential policymakers' welfare choices based on a policy exercise that determines optimal capital requirements for banks. The inter-linkages between the financial system and the real economy are analyzed with a DSGE model with financial frictions, providing a rationale for capital regulation. The existence of heterogeneous agents allows several equilibria depending on the balance between potential conflicting objectives of savers - who favor banking resilience - and borrowers - who benefit from better credit conditions. These equilibria can be translated into preferences policymakers have between promoting the resilience of the banking system and economic growth. These preferences are modeled through three welfare-maximising strategies. We find that policymakers' preferences play a role in determining optimal capital requirements, which, in turn, conditions bank resilience, economic growth and well-being in the long-run. The sum of welfare gains strategy yields higher banking sector resilience, while improving the well-being of savers without disregarding the interests of borrowers.

Suggested Citation

  • Diana Lima & Duarte Maia & Rita Basto, 2026. "Balancing acts: policymakers' choices between bank resilience and economic growth," Working Papers w202607, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w202607
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