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Risk-to buffer: setting cyclical and structural banks capital requirements through stress test

Author

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  • Couaillier, Cyril
  • Scalone, Valerio

Abstract

In this paper, we propose a new framework to jointly calibrate cyclical and structural capital requirements. For this, we integrate a non-linear macroeconomic model and a stress test model. In the macroeconomic model, the severity of the scenarios depends on the level of cyclical risk. Risk-related scenarios are used as inputs for the stress test model. Banks’ capital losses derived from a scenario based on a reference level of risk are used to set the structural requirement. Additional losses associated with the current risk scenario are used to set the cyclical requirement. This approach provides a transparent method to strike the balance between cyclical and structural requirements. JEL Classification: C32, E51, E58, G01

Suggested Citation

  • Couaillier, Cyril & Scalone, Valerio, 2024. "Risk-to buffer: setting cyclical and structural banks capital requirements through stress test," Working Paper Series 2966, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20242966
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    More about this item

    Keywords

    capital requirements; financial vulnerability; macroprudential policy; non-linear models;
    All these keywords.

    JEL classification:

    • 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
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises

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