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

Cyril Couaillier and Valerio Scalone

No 2966, Working Paper Series from European Central Bank

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

Keywords: capital requirements; financial vulnerability; macroprudential policy; non-linear models (search for similar items in EconPapers)
Date: 2024-08
New Economics Papers: this item is included in nep-cba and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20242966

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