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Risk-to-Buffer: Setting Cyclical and Structural Capital Buffers through Banks Stress Tests

Author

Listed:
  • Cyril Couaillier
  • Valerio Scalone

Abstract

In this work we present the Risk-to-Buffer: a new framework to jointly calibrate cyclical and structural capital buffers, based on the integration of a non-linear macroeconomic model with a Stress test model. The macroeconomic model generates scenarios whose severity depends on the level of cyclical risk. Risk-related scenarios feed into a banks' Stress test model. Banks' capital losses deriving from the reference-risk scenario are used to calibrate the structural buffer. Additional losses associated to the current-risk scenario are used to calibrate the cyclical buffer.

Suggested Citation

  • Cyril Couaillier & Valerio Scalone, 2021. "Risk-to-Buffer: Setting Cyclical and Structural Capital Buffers through Banks Stress Tests," Working papers 830, Banque de France.
    • Handle: RePEc:bfr:banfra:830
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    File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/wp830.pdf
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    References listed on IDEAS

    as
    1. Mathias Drehmann & Anamaria Illes & Mikael Juselius & Marjorie Santos, 2015. "How much income is used for debt payments? A new database for debt service ratios," BIS Quarterly Review, Bank for International Settlements, September.
    2. Claudio Borio & Philip Lowe, 2002. "Assessing the risk of banking crises," BIS Quarterly Review, Bank for International Settlements, December.
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    Cited by:

    1. Joana Passinhas, 2023. "A macroprudential look into the risk-return framework of banks’ profitability," Working Papers w202303, Banco de Portugal, Economics and Research Department.
    2. Joana Passinhas & Ana Pereira, 2023. "A macroprudential look into the risk-return framework of banks’ profitability," Working Papers REM 2023/0265, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.

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    More about this item

    Keywords

    Financial Vulnerability; Macroprudential Policy; Non-linear Models; Macroprudential Space; Deb;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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