Capital Requirements in Light of Monetary Tightening

Aurélien Espic, Lisa Kerdelhué and Julien Matheron
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Aurélien Espic: Banque de France, Aix Marseille University, CNRS and AMSE

International Journal of Central Banking, 2026, vol. 22, issue 2, 295-397

Abstract: In 2021, euro-area inflation surged, prompting the European Central Bank to reverse its monetary stance. This paper argues that this shift did not generate significant financial stress, partly because of the bank capital requirements introduced in the 2010s. We develop a framework to assess their effects over the business cycle. Although capital requirements remained broadly stable, they shaped the transmission of the structural shocks underlying this episode. We find that while these requirements modestly constrained post-COVID growth, they successfully prevented the materialization of risks. Overall, capital requirements strengthened the economy’s resilience to adverse shocks at a relatively low macroeconomic cost.

Date: 2026
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Working Paper: Capital Requirements in Light of Monetary Tightening (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2026:q:2:a:4

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