Basel III countercyclical bank capital buffer estimation and its relation to monetary policy

Juan F. Rendón, Lina Cortés and Javier Perote

Journal of Economics and Business, 2024, vol. 130, issue C, No S0148619524000158

Abstract: This paper proposes a new model to estimate the countercyclical bank solvency capital buffer established in Basel III. The model lies in a flexible semi-nonparametric approach to capture the probability distribution of the capital adequacy ratio, but also a stochastic Ornstein–Uhlenbeck process that incorporates components of the cyclical behavior. We measure the risk of breaching the minimum capital threshold that separates the countercyclical capital buffer from other capital components and analyze its relationship with macroeconomic variables such as interest rates, credit levels, and credit-to-GDP gaps. Furthermore, a vector autoregressive model is estimated to test the existence of the bank-capital channel and the risk-taking channel. The application to Germany and the Netherlands shows that countercyclical buffers are more accurate when skewness and kurtosis are considered and the probability of breaching the regulatory threshold is sensitive to macroeconomic signals. Overall, our model seems to be a useful tool for monitoring prudential policy and as a guide to establish countercyclical capital buffers.

Keywords: Prudential regulation; Risk metrics; Risk-taking channel; Bank-Capital Channel; SNP approach (search for similar items in EconPapers)
JEL-codes: C14 C22 C51 G21 G28 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:130:y:2024:i:c:s0148619524000158

DOI: 10.1016/j.jeconbus.2024.106173

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