Research

Abstract: This paper examines whether a Counter-Cyclical Buffer (CCyB) indexed to carbon-intensive credits, i.e., a carbon-intensive CCyB, is consistent with the banking stability objectives of financial regulators when unregulated banks operate in credit markets. To do so, we assess the consistency of the carbon-intensive CCyB regulation through the lens of a general equilibrium model that encompasses polluting and non-polluting firms (i.e., green and brown firms, respectively), as well as traditional and shadow banks (i.e., regulated and unregulated banks, respectively). We find that a carbon intensive CCyB regulation is not the most suitable for financial regulators when there are no asymmetric leakages between green and brown loans for traditional and shadow banks. However, a strict emissions tax applied to the production of brown firms favors the adoption of a carbon-intensive CCyB regulation by financial regulators. Moreover, a carbon-intensive CCyB could be suitable when traditional banks are more involved in the green credit market than in the brown one. This last result highlights the need for regulators to carefully coordinate their green policies to avoid jeopardizing the stability of the banking system.

Keywords: Counter-Cyclical Capital Buffers, Carbon-Intensive Credits, Shadow Banks, General Equilibrium Model

JEL classification: Q54, G21, E44, E51. 

Abstract: The paper evaluates the efficiency of the key Basel 3 finalization instrument - the Output Floor - in a agent-based credit network model encompassing a corporate and an inter-bank loan market with heterogeneous firms and banks. The model is designed to reproduce the evolution of key financial indicators in Euro Area and fitted with the empirical Output Floor setting. We get three main results. First, the Output Floor reduces average and the dispersion of the Risk-Weighted-Assets (RWA) density across banks using the Internal-Rating-Based (IRB) approach. This result highlights the help of the Output Floor to restore the trust of financial actors in RWA Basel framework. Second, a tighter Output Floor pushes up further the average of RWA density for IRB-banks but increases its dispersion. It implies that Output Floor efficiency does not only rely on reducing dispersion but also on shaping a RWA density distribution of IRB-banks close to the one obtained for banks using the standardized approach. Third, an accommodate monetary policy favors the building of banking risk and reduces Output Floor efficiency while a tighter monetary policy does the opposite. Therefore, financial regulators have to coordinate their policy carefully in order to maintain banking stability.

Keywords: Credit Network, RWA Density, Output Floor, Agent-Based Model

JEL classification: E51, G18, G28, C63. 

Abstract: The paper studies the influence of shadow banking on the efficiency of two important green prudential proposals for credit risk of traditional banks : the Green Supporting Factor (GSF) and the Brown Penalizing Factor (BPF). Through an environmental general equilibrium model, the paper shows that, without shadow banks in the model, the use of the BPF or GSF generates a negative relationship between banking stability and environmental benefits. By introducing shadow banks, the use of BPF allows to maintain banking stability and to generate environmental benefits at the same time. These results emphasize the need to take into account shadow banking sector in a consistent assessment of green credit risk regulation proposals.

Keywords: Credit risk, Prudential regulation, Shadow banking, Green finance, DSGE. 

JEL classification: Q54, G21, E44, E51.

Abstract: In the aftermath of the Global Financial Crisis, financial regulation uses micro and macroprudential rules, most of the time motivated by empirical studies. This article suggests a theoretical explanation for countercyclical and progressive capital requirements that incorporate micro- and macro-prudential stabilization objectives. The Capital Adequacy Ratio (CAR) imposed to individual banks by a Prudential Authority (PA) would thus represent an optimal regulation whose aim is to avoid individual and systemic risk accumulation by imposing minimal constraints to financial institutions. This corresponds to the implementation of optimal time-varying prudential capital requirements to banks, with non-linear structure, that allows PA to take progressive countercyclical actions in order to ensure financial stability. We also test the mechanism in a DSGE model and show that it would be more suitable for the financial and real stability compared to the existing fixed prudential ratios.

Keywords: Prudential regulation model, Optimal CAR, Time-varying capital requirements, DSGE model.

JEL classification: E44, G21, G28.

Abstract: This paper examines whether the key Basel 3 finalization regulation - the Output Floor - must be applied to green credit risk in order to favor stability of the banking system and the green transition. To do so, we assess macrofinancial and environmental benefits of a ”brown” Output Floor, which is only applied to brown credit risk, for the Euro Area through the lens of a general equilibrium model. We found that when banks care about green transition, the use of a brown Output Floor leads financial regulator to face a trade-off between environmental benefits and banking stability. We show that the joint use of a brown Output Floor and a green quantitative easing erases the trade-off while a tax on polluting firms maintains the trade-off. This result highlights the need of financial regulator to coordinate their green policies carefully in order to promote banking stability and green transition.

Keywords: Output Floor, Credit Risk, Green Finance, Climate Change, DSGE.

JEL classification: Q54, G21, E44, E51. 

Résumé: Ce travail cherche à quantifier la réduction du chômage structurel en France qui pourrait éventuellement être obtenue par la mise en oeuvre de réformes visant à alléger la charge réglementaire sur les entreprises sans nuire aux objectifs poursuivis par la réglementation. Parmi les objectifs des réglementations existantes, on peut citer les suivants : assurer la qualité des biens et services, garantir la sécurité des consommateurs et veiller à la préservation de l’environnement. Une réglementation mal calibrée peut créer des situations de rente pour les entreprises, avec pour conséquence des prix en hausse et une moindre qualité. D’où l’importance d’améliorer la réglementation de manière à ne pas entraver la concurrence afin de contribuer à une baisse des prix, à une augmentation du pouvoir d’achat, et à une hausse de la production donc de l’emploi. Une comparaison est menée avec les principaux partenaires de la France (notamment l’Allemagne et le Royaume-Uni) afin d’identifier les principales pistes de réformes proposées par les grandes institutions internationales pour améliorer la qualité de la réglementation. Par la suite, un modèle macroéconomique original est mobilisé afin de chiffrer les gains potentiels de telles réformes sur l’économie française en particulier du point de vue du niveau du chômage structurel. 

Mots clés:  Réglementation, chômage, marché des biens et services.

Abstract: Output floor has emerged as a possibly important tool to ensure financial stability within the banking system. This paper proposes to assess the quantitative potential of output floor to ensure financial stability through the lens of a general equilibrium model for the Euro Area. We get three main results. First, implementation of output floor entails macrofinancial stabilization benefits for Euro Area activities in the long run, which confirms results found by financial European regulators. Second, along financial and economic cycles, output floor activation reduces volatility of banks capital to risk-weighted-asset ratio and the dispersion of this ratio between core and periphery banks, consistently with the desired outcome defined by financial regulators. Third, moderate banking openness in Euro Area limits cross-border credit flows spillovers, which does not affect output floor efficiency. However, full banking openness (i.e. banking union) produces high spillovers and erodes this efficiency.

Keywords: Output Floor, Credit Risk, Banking System, Euro Area, DSGE.

JEL classification: G21, F36, F41, E44.

Abstract: Differentiated treatment of green credit risk in banks’ capital requirements to favor green transition generates lot of debates among European prudential regulators. The aim of this paper is to examine whether the key Basel 3 finalization instrument - the Output Floor - should be applied to green credit risk in order to ensure stability of banking system and promote green finance. To do so, we assess macrofinancial and environmental benefits of such green policy for the Euro Area through the lens of a general equilibrium model. We get three main results. First, when banks get transitory ’environmental awareness’, an Output Floor (OF) applied to brown credits only (i.e. a brown OF) faces a trade-off between limiting environmental aftermaths and reaching OF objectives (i.e reducing volatility of banks’ capital adequacy ratio). Second, to mitigate the prudential cost of this trade-off, brown OF should be joined with additional green financial policies such as green Quantitative Easing. Third, pollutant emissions tax erodes brown OF efficiency along financial and economic cycles but limits the welfare cost implied by pollution in the long run.

Keywords: Output Floor, Credit Risk, Green Finance, Climate Change, DSGE.

JEL classification: Q54, G21, E44, E51. 

Abstract: The paper assesses the impact of the new standardized mortgage risk reforms on housing wealth and income inequality among mortgage borrowers. To do so, we develop a tractable general equilibrium framework that captures the interactions between savers and borrowers in the housing market, explicitly accounting for heterogeneity in borrowing constraints and credit risk across mortgage borrowers. Borrowers are also subject to financial frictions and a default mechanism consistent with the structure of current risk-weighted regulatory requirements. We find that the new reforms mitigate housing wealth and income inequality during periods of housing market expansion but exacerbate these inequalities during financial downturns. Moreover, we show that both the heterogeneity of long-term default probabilities among mortgage borrowers and the Loan-to-Value (LTV) ratio distribution play a crucial role in shaping housing wealth and income inequality. These findings underscore the importance for financial regulators to consider the distributional effects of the new reforms in order to better identify concentrations of default risk in the mortgage market, which could otherwise materialize into future banking crises.

Keywords: New Credit Risk Regulations, Standardized Approach, Wealth Inequality, Heterogeneous Agents, General Equilibrium Model

JEL classification: D31 ; G21 ; G51 ; R21 ; R31.