Research

This paper explores the role of Borrower-Based Macroprudential (BBM) policies in enhancing financial resilience through the joint operation of credit demand and credit supply channels. The empirical evidence and model-based analysis reveal that financial frictions on the borrower and lender sides do not operate in isolation. A simple theoretical model illustrates how these two frictions interact to generate powerful amplification mechanisms. The simulations show that tighter LTV ratios mitigates recessions by weakening the feedback loop between falling asset prices, borrower defaults, and deteriorating bank balance sheets. The results indicate that BBM policies stabilize the economy not only by moderating credit demand but also by supporting credit supply.

This paper analyzes the side effects of monetary policy tightening on financial stability through the lens of a DSGE model where banks and households endogenously default. We find that a combination of borrower- and capital-based macroprudential policies can mitigate these side effects and improve welfare. More specifically, structurally tighter capital requirements and loan-to-value (LTV) caps improve financial stability by reducing the likelihood of default by banks and households. However, tighter structural policies reduce access to credit, triggering a negative effect on welfare. Time-varying policies, such as counter-cyclical capital buffers (CCyB) and adjustable LTV caps, are able to mitigate ex-post adverse effects, allowing for less tight optimal structural policies and thus significantly improving welfare. Finally, we find that the effects of the CCyB are highly state-dependent. The releases support credit availability when banks are strong, but the increase in risk could offset their counter-cyclical effects if banks are fragile.

This paper proposes a novel methodology to calibrate the Countercyclical Capital Buffer (CCyB), with particular focus on the positive neutral CCyB (PN CCyB) rate. It implements a Risk-to-Buffer approach in both a DSGE and a macroeconomic time series setting. The methodology consists in estimating the amplification of adverse shocks triggered by different levels of systemic risk, and calibrating the CCyB to offset the corresponding amplification effect. In particular, the PN CCyB is calibrated to mitigate the macroeconomic amplification of shocks that occur when systemic risk is neither subdued nor elevated. The flexibility of the approach, regarding the choice of modeling tools, the selection of risk levels, and the identification of state variables and exogenous shocks, makes it particularly well suited to national specificities and policymakers’ preferences.