The Benefits and Costs of Adjusting Bank Capitalisation: Evidence from Euro Area Countries

65 Pages Posted: 15 Jul 2019

See all articles by Katarzyna Barbara Budnik

Katarzyna Barbara Budnik

European Central Bank (ECB) - Directorate Financial Stability and Supervision

Massimiliano Affinito

Bank of Italy

Gaia Barbic

European Central Bank (ECB)

Saifeddine Ben Hadj

Louvain School of Management (UCL)

Edouard Chretien

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

Hans Dewachter

National Bank of Belgium

Clara I. Gonzalez

Banco de España

Jenny Hu

De Nederlandsche Bank

Lauri Jantunen

Suomen Panki

Ramona Jimborean

Banque de France

Otso Manninen

Suomen Panki

Ricardo Martinho

Bank of Portugal

Javier Mencia

Banco de España

Elena Mousarri

Central Bank of Cyprus

Laurynas Narusevicius

Bank of Lithuania

Giulio Nicoletti

European Central Bank

Michael O'Grady

Central Bank of Ireland

Selcuk Ozsahin

Bank of Slovenia

Ana Regina Pereira

Bank of Portugal

Jairo Rivera-Rozo

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Fabrizio Venditti

Bank of Italy

Constantinos Trikoupis

Central Bank of Cyprus

Sofia Velasco

Central Bank of Ireland

Multiple version iconThere are 2 versions of this paper

Date Written: July 15, 2019

Abstract

The paper proposes a framework for assessing the impact of system-wide and bank-level capital buffers. The assessment rests on a factor-augmented vector autoregression (FAVAR) model that relates individual bank adjustments to macroeconomic dynamics. We estimate FAVAR models individually for eleven euro area economies and identify structural shocks, which allow us to diagnose key vulnerabilities of national banking systems and estimate short-run economic costs of increasing banks’ capitalisation. On this basis, we run a fullyfledged cost-benefit assessment of an increase in capital buffers. The benefits are related to an increase in bank resilience to adverse shocks. Higher capitalisation allows banks to withstand negative shocks and moderates the reduction of credit to the real economy that ensues in adverse circumstances. The costs relate to transitory credit and output losses that are assessed both on an aggregate and bank level. An increase in capital ratios is shown to have a sharply different impact on credit and economic activity depending on the way banks adjust, i.e. via changes in assets or equity.

Keywords: FAVAR, capital regulation, cost-benefit analysis, banking system resilience

JEL Classification: E51, G21, G28

Suggested Citation

Budnik, Katarzyna Barbara and Affinito, Massimiliano and Barbic, Gaia and Ben Hadj, Saifeddine and Chretien, Edouard and Dewachter, Hans and Gonzalez, Clara I. and Hu, Jenny and Jantunen, Lauri and Jimborean, Ramona and Manninen, Otso and Martinho, Ricardo and Mencia, Javier and Mousarri, Elena and Naruševičius, Laurynas and Nicoletti, Giulio and O'Grady, Michael and Ozsahin, Selcuk and Pereira, Ana Regina and Rivera-Rozo, Jairo and Venditti, Fabrizio and Trikoupis, Constantinos and Velasco, Sofia, The Benefits and Costs of Adjusting Bank Capitalisation: Evidence from Euro Area Countries (July 15, 2019). Banco de Espana Working Paper No. 1923 (2019). Available at SSRN: https://ssrn.com/abstract=3419995 or http://dx.doi.org/10.2139/ssrn.3419995

Katarzyna Barbara Budnik (Contact Author)

European Central Bank (ECB) - Directorate Financial Stability and Supervision ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Massimiliano Affinito

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Gaia Barbic

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Saifeddine Ben Hadj

Louvain School of Management (UCL) ( email )

Belgium

Edouard Chretien

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Hans Dewachter

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Clara I. Gonzalez

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Jenny Hu

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Lauri Jantunen

Suomen Panki ( email )

Ramona Jimborean

Banque de France ( email )

Paris
France

Otso Manninen

Suomen Panki ( email )

Ricardo Martinho

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

Javier Mencia

Banco de España ( email )

Alcala 50
Madrid 28014
Spain
+34 91 338 5414 (Phone)
+34 91 338 6104 (Fax)

HOME PAGE: http://www.bde.es/investigador/staff/66.htm

Elena Mousarri

Central Bank of Cyprus ( email )

80 Kennedy Ave
1076 Nicosia
Cyprus

Laurynas Naruševičius

Bank of Lithuania ( email )

Totoriu 4
Vilnius, LT-01121
Lithuania

Giulio Nicoletti

European Central Bank ( email )

Kaiserstrasse 29
Frankfurt am Main, Hessen 60311
Germany

Michael O'Grady

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Selcuk Ozsahin

Bank of Slovenia ( email )

Slovenska cesta 35
Slovenija, 1505
Slovenia

Ana Regina Pereira

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

Jairo Rivera-Rozo

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Fabrizio Venditti

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Constantinos Trikoupis

Central Bank of Cyprus ( email )

80 Kennedy Ave
1076 Nicosia
Cyprus

Sofia Velasco

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

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