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

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  • Ana Pereira

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.

Suggested Citation

  • Ana Pereira, 2023. "Structural and cyclical capital instruments in the 3D model: a simulation for Portugal," Working Papers w202315, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w202315
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    File URL: https://www.bportugal.pt/sites/default/files/anexos/papers/wp202315.pdf
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    References listed on IDEAS

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    1. Samuel G. Hanson & Anil K. Kashyap & Jeremy C. Stein, 2011. "A Macroprudential Approach to Financial Regulation," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 3-28, Winter.
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    Cited by:

    1. Tiago Pinheiro, 2023. "The Covid-19 Pandemic, Sovereign Loan Guarantees, and Financial Stability," Working Papers w202313, Banco de Portugal, Economics and Research Department.
    2. Pirovano, Mara & Azzone, Michele, 2024. "Aim, focus, shoot. The choice of appropriate and effective macroprudential instruments," Working Paper Series 2979, European Central Bank.
    3. Duarte Maia, 2023. "Prudential policy treatments to the COVID-19 economic crisis: an assessment of the effects," Working Papers w202314, Banco de Portugal, Economics and Research Department.

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    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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