The 3D model was initially developed under the Macroprudential Research Network (MaRS) by a team composed of members from the Banque the France (Laurent Clerc), Banco de Portugal (Caterina Mendicino), Bundesbank (Stephane Moyen), The Czech National Bank (Alexis Derviz), ECB (Kalin Nikolov and Livio Stracca) and The Federal Reserve Board (Alex Vardoulakis).
The 3D model is a medium-scale micro-founded model designed for conducting quantitative macro-prudential policy analysis.
The model is the result of an effort to coherently put together the following ingredients:
(i) Bank borrowing by some (impatient) households for the purchase of housing; default occurs when the mortgagor falls into negative equity.
(ii) Bank borrowing by the corporate sector to fund their investment; default occurs when firm revenues are insufficient to repay the debt.
(iii) A bank centered financial system where intermediaries fund themselves with equity and insured deposits and lend to firms and households. Banks are subject to capital requirements and default whenever loan revenues are insufficient to repay depositors.
All ingredients are introduced in a way compatible with performing an explicit welfare analysis of macroprudential policies.
The 3D model has been operationalized under the Task Force on Operazionalizing Macroprudential Research (OMRTF) by a team of national experts.
In the following paper and policy articles we illustrate the original setup of the 3D Model. We also show the implications for an array of illustrative shocks that are often examined in policy simulations at national central banks and international policy institutions.
ASSESSING CAPITAL REGULATION IN A MACROECONOMIC MODEL WITH THREE LAYERS OF DEFAULTS ( L. Clerc, S. Moyen, A. Derviz, C. Mendicino, K. Nikolov, L. Stracca, J. Suarez, and A.Vardoulakis) June 2015, Pages 9-63, INTERNATIONAL JOURNAL OF CENTRAL BANKING.
We develop a model which aims at providing a framework for the positive and normative analysis of macroprudential policies. The basic model incorporates optimizing financial intermediaries ("bankers") who allocate their scarce wealth ("inside equity") together with funds raised from saving households across two lending activities, mortgage lending and corporate lending. External financing for all borrowers (including banks) takes the form of external debt which is subject to default risk. The model shows the interplay of three interconnected net worth channels as well as distortions due to deposit insurance, and can be extended to analyse the implications of securitization and liquidity risk. The setup allows an explicit welfare analysis of macroprudential policies.
Presented at: EABCN conference in Cambridge, Second and Final Conference of MaRs, the spring 2014 WGEM meeting, ESSIM 2014, the 2014 IJCB Conference, Czech National Bank, Deutsche Bundesbank, Bank of Cyprus, Bank of England, Bank of Greece, Banco de Portugal, Banka Slovenije, International Monetary Fund, Norges Bank, Polish National Bank, Sveriges Riksbank, and University of Cologne
Discussion by Nobuhiro Kiyotaki
POLICY ARTICLES:
Financial instability in macroeconomics: a set of new structural models (F. Boissay, P. Hartmann and K. Nikolov), ECB-Research Bulletin 22, 2015.
The 3D Model: a Framework to Assess Capital Regulation ( L. Clerc, C. Mendicino, S. Moyen, A. Derviz, K. Nikolov, L. Stracca, J. Suarez, A.Vardoulakis), Economic Bulletin, Banco de Portugal, June 2014.
Macro-prudential Capital Tools: Assessing Their Rationale and Effectiveness (L. Clerc, C. Mendicino, S. Moyen, A. Derviz, K. Nikolov, L. Stracca, J. Suarez, A.Vardoulakis), Financial Stability Review, Banque de France, April 2014.
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The 3D Model has been extended in the following research papers to address further policy questions:
WELFARE ANALYSIS OF IMPLEMENTABLE MACROPRUDENTIALPOLICY RULES: HETEROGENEITY AND TRADE-OFFS (C. Mendicino, K. Nikolov, J. Suarez, and D. Supera)
We characterize social welfare maximizing capital requirement policies in a macroeconomic model with household, firm and bank defaults calibrated to Euro Area data. We find that the most important role of capital regulation is to ensure that banks are sufficiently capitalized so as to keep the risk of bank failure small. Getting the level and the risk weight parameters right is then of foremost importance. The counter-cyclical adjustment of capital requirements is also beneficial but its welfare impact is smaller. When capital requirements are low, all agents benefit from increasing them. Beyond a certain level, a trade-o/ appears between the welfare of savers and borrowers. Savers benefit from tighter capital regulation due to lower social costs from bank failures and higher bank profits. Borrowers lose due to a reduced supply of bank loans.
Presented at: Banco de Portugal, ECB, Institute for International Economics and Development (Vienna), CREST, Swiss National Bank, Bank of Portugal Conference on Financial Stability and Macroprudential Policy, Birkbeck workshop for applied macroeconomics and the SAET 2015 conference.
OPTIMAL DYNAMIC CAPITAL REQUIREMENTS (with K. Nikolov, J. Suarez, and D. Supera), 2017, forthcoming JOURNAL OF MONEY CREDIT AND BANKING.
We characterize welfare maximizing capital requirement policies in a macroeconomic model with household, firm and bank defaults calibrated to Euro Area data. We optimize on the level of the capital requirements applied to each loan class and their sensitivity to changes in default risk. We find that getting the level right (so that bank failure risk remains small) is of foremost importance, while the optimal sensitivity to default risk is positive but typically smaller than under Basel IRB formulas. When starting from low levels, initially both savers and borrowers benefit from higher capital requirements. At higher levels, only savers are in favour of tighter and more time-varying capital charges.