Structural and cyclical capital instruments in the 3D model: a simulation for Portugal

Ana Pereira

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: In this study, we assess the effectiveness of structural and cyclical capital requirements under distinct sources of disturbance. The analysis is based on the model of Clerc et al. (2015) with three layers of default (3D model) calibrated for the Portuguese economy. We conclude that an increase in capital requirements, regardless of their structural or cyclical nature, enhances the resilience of the banking sector to adverse shocks and reduces the impact of those disturbances on the well-functioning of the banking sector. Nonetheless, results also indicate that capital requirements can be more effective if the distress emerges from within the financial system, corroborating the idea that prudential policies are not meant to be the first line of defense to address all types of shock. Countercyclical capital buffers also help counter some of the pro-cyclicality in the financial system by smoothing the crunch in credit flows. Structural and cyclical capital instruments can be considered as strategic complements as they reinforce each others’ policy goals.

JEL-codes: E3 E44 G01 G21 O52 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-cba
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w202315

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