Assessing the Costs and Benefits of Capital-Based Macroprudential Policy

46 Pages Posted: 5 Nov 2020

See all articles by Markus Behn

Markus Behn

European Central Bank (ECB)

Marco Gross

International Monetary Fund (IMF); European Central Bank (ECB)

Tuomas Peltonen

European Systemic Risk Board

Multiple version iconThere are 2 versions of this paper

Date Written: July, 2016

Abstract

We develop an integrated Early Warning Global Vector Autoregressive (EW-GVAR) model to quantify the costs and benefits of capital-based macroprudential policy measures. Our findings illustrate that capital-based measures are transmitted both via their impact on the banking system’s resilience and via indirect macro-financial feedback effects. The feedback effects relate to dampened credit and asset price growth and, depending on how banks move to higher capital ratios, can account for up to a half of the overall effectiveness of capitalbased measures. Moreover, we document significant cross-country spillover effects, especially for measures implemented in larger countries. Overall, our model helps to understand how and through which channels changes in capitalization affect bank lending and the wider economy and can inform policy makers on the optimal calibration and timing of capital-based macroprudential instruments.

Keywords: macroprudential policy, cost-benefit analysis, early-warning system, GVAR

JEL Classification: G01, G21, G28

Suggested Citation

Behn, Markus and Gross, Marco and Peltonen, Tuomas, Assessing the Costs and Benefits of Capital-Based Macroprudential Policy (July, 2016). ESRB: Working Paper Series No. 2016/17, Available at SSRN: https://ssrn.com/abstract=3723362

Markus Behn (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Marco Gross

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Tuomas Peltonen

European Systemic Risk Board ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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