A structural model of capital buffer usability

Jan Hannes Lang and Dominik Menno

No 3188, Working Paper Series from European Central Bank

Abstract: Under which conditions do usability constraints for regulatory capital buffers emerge? To answer this question, we build a non-linear structural banking sector model with a minimum capital requirement that banks are not allowed to breach, and a capital buffer requirement (CBR) that banks can breach but if they do so potential stigma applies. We prove that even very low stigma costs induce large buffer usability constraints, i.e. when faced with losses banks will deleverage significantly to avoid that their capital ratio falls below the CBR. Our findings imply that non-releasble regulatory capital buffers are unlikely to fully achieve their macro stabilisation goal to support aggregate loan supply when the banking system faces losses. JEL Classification: D21, E44, E51, G21, G28

Keywords: bank capital requirements; buffer usability; capital buffers; loan supply; macroprudential policy (search for similar items in EconPapers)
Date: 2026-02
New Economics Papers: this item is included in nep-cba
Note: 2731285
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20263188

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