IDEAS home Printed from https://ideas.repec.org/p/ude/wpaper/0917.html
   My bibliography  Save this paper

Countercyclical Prudential Tools in an Estimated DSGE Model

Author

Listed:
  • Serafín Frache

    (Banco Central del Uruguay y Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)

  • Javier García-Cicco

    (Banco Central de Chile y Universidad Católica Argentina)

  • Jorge Ponce

    (Banco Central del Uruguay y Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)

Abstract

We develop a DSGE model for a small, open economy with a banking sector and endogenous default. The model is used to perform a realistic assessment of two macroprudential tools: countercyclical capital buffers (CCB) and dynamic provisions (DP). The model is estimated with data for Uruguay, where dynamic provisioning is in place since early 2000s. In general, while both tools force banks to build buffers, we find that DP seems to outperform the CCB in terms of smoothing the cycle. We also find that the source of the shock affecting the financial system matters to discuss the relative performance of both tools. In particular, given a positive external shock the ratio of credit to GDP decreases, which discourages its use as an indicator variable to activate countercyclical regulation.

Suggested Citation

  • Serafín Frache & Javier García-Cicco & Jorge Ponce, 2017. "Countercyclical Prudential Tools in an Estimated DSGE Model," Documentos de Trabajo (working papers) 0917, Department of Economics - dECON.
    • Handle: RePEc:ude:wpaper:0917
    as

    Download full text from publisher

    File URL: https://hdl.handle.net/20.500.12008/19990
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2007. "Optimal simple and implementable monetary and fiscal rules," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1702-1725, September.
    2. Martín Tobal, 2013. "Currency Mismatch: New Database and Indicators for Latin America and the Caribbean," Documentos de Investigación - Research Papers 12, CEMLA.
    3. Charles Goodhart & Pojanart Sunirand & Dimitrios Tsomocos, 2006. "A model to analyse financial fragility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(1), pages 107-142, January.
    4. Fabiana Gómez & Jorge Ponce, 2019. "Regulation and Bankers’ Incentives," Journal of Financial Services Research, Springer;Western Finance Association, vol. 56(3), pages 209-227, December.
    5. Jokipii, Terhi & Milne, Alistair, 2011. "Bank capital buffer and risk adjustment decisions," Journal of Financial Stability, Elsevier, vol. 7(3), pages 165-178, August.
    6. Bouvatier, Vincent & Lepetit, Laetitia, 2012. "Provisioning rules and bank lending: A theoretical model," Journal of Financial Stability, Elsevier, vol. 8(1), pages 25-31.
    7. Barth,James R. & Caprio,Gerard & Levine,Ross, 2008. "Rethinking Bank Regulation," Cambridge Books, Cambridge University Press, number 9780521709309, September.
    8. Jokipii, Terhi & Milne, Alistair, 2008. "The cyclical behaviour of European bank capital buffers," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1440-1451, August.
    9. Agénor, Pierre-Richard & Zilberman, Roy, 2015. "Loan Loss Provisioning Rules, Procyclicality, and Financial Volatility," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 301-315.
    10. Jiménez, Gabriel & Ongena, Steven & Peydró, José-Luis & Saurina, Jesús, 2017. "Macroprudential policy, countercyclical bank capital buffers and credit supply: evidence from the spanish dynamic provisioning experiments," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 125(6), pages 2126-2177.
    11. Christian Glocker & Pascal Towbin, 2012. "Reserve Requirements for Price and Financial Stability: When Are They Effective?," International Journal of Central Banking, International Journal of Central Banking, vol. 8(1), pages 65-114, March.
    12. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    13. Elias Minaya & Miguel Cabello, 2017. "Macroprudential Policies in Peru: The effects of Dynamic Provisioning and Conditional Reserve Requirements," BIS Working Papers 675, Bank for International Settlements.
    14. Chris Woolston, 2014. "Rice," Nature, Nature, vol. 514(7524), pages 49-49, October.
    15. Ayuso, Juan & Perez, Daniel & Saurina, Jesus, 2004. "Are capital buffers pro-cyclical?: Evidence from Spanish panel data," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 249-264, April.
    16. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and Banking in a DSGE Model of the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 107-141, September.
    17. Peura, Samu & Jokivuolle, Esa, 2004. "Simulation based stress tests of banks' regulatory capital adequacy," Journal of Banking & Finance, Elsevier, vol. 28(8), pages 1801-1824, August.
    18. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2014. "Risk Shocks," American Economic Review, American Economic Association, vol. 104(1), pages 27-65, January.
    19. Bouvatier, Vincent & Lepetit, Laetitia, 2012. "Provisioning rules and bank lending: A theoretical model," Journal of Financial Stability, Elsevier, vol. 8(1), pages 25-31.
    20. Agénor, Pierre-Richard & Pereira da Silva, Luiz, 2017. "Cyclically adjusted provisions and financial stability," Journal of Financial Stability, Elsevier, vol. 28(C), pages 143-162.
    21. David VanHoose, 2008. "Bank Capital Regulation, Economic Stability, and Monetary Policy: What Does the Academic Literature Tell Us?," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 36(1), pages 1-14, March.
    22. Matthieu Darracq Pariès & Christoffer Kok Sørensen & Diego Rodriguez-Palenzuela, 2011. "Macroeconomic Propagation under Different Regulatory Regimes: Evidence from an Estimated DSGE Model for the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 49-113, December.
    23. Fonseca, Ana Rosa & González, Francisco, 2010. "How bank capital buffers vary across countries: The influence of cost of deposits, market power and bank regulation," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 892-902, April.
    24. Lindquist, Kjersti-Gro, 2004. "Banks' buffer capital: how important is risk," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 493-513, April.
    25. Jorge Basal & Patricia Carballo & Fernanda Cuitiño & Serafín Frache & José Mourelle & Helena Rodríguez & Verónica Rodríguez & Leonardo Vicente, 2016. "Un modelo estocástico de equilibrio general para la economía uruguaya," Documentos de trabajo 2016002, Banco Central del Uruguay.
    26. Stolz, Stéphanie & Wedow, Michael, 2011. "Banks' regulatory capital buffer and the business cycle: Evidence for Germany," Journal of Financial Stability, Elsevier, vol. 7(2), pages 98-110, June.
    27. Allen Berger & Robert DeYoung & Mark Flannery & David Lee & Özde Öztekin, 2008. "How Do Large Banking Organizations Manage Their Capital Ratios?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 34(2), pages 123-149, December.
    28. Michael Chui & Emese Kuruc & Philip Turner, 2016. "A new dimension to currency mismatches in the emerging markets - non-financial companies," BIS Working Papers 550, Bank for International Settlements.
    29. Cabello, Miguel & Lupú, José & Minaya, Elías, 2017. "Macroprudential Policies in Peru: The effects of Dynamics Provisioning and Conditional Reserve Requirements," Working Papers 2017-002, Banco Central de Reserva del Perú.
    30. Allen, Linda & Rai, Anoop, 1996. "Bank charter values and capital levels: An international comparison," Journal of Economics and Business, Elsevier, vol. 48(3), pages 269-284, August.
    31. Gertler, Mark & Kiyotaki, Nobuhiro & Queralto, Albert, 2012. "Financial crises, bank risk exposure and government financial policy," Journal of Monetary Economics, Elsevier, vol. 59(S), pages 17-34.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Khoshnevis , Maryam & Ahmadyan , Azam, 2017. "Modeling Basel Regulatory in DSGE with Emphasis on Adequacy Regulatory," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 12(4), pages 379-407, October.
    2. Rendón, Juan F. & Cortés, Lina M. & Perote, Javier, 2024. "Basel III countercyclical bank capital buffer estimation and its relation to monetary policy," Journal of Economics and Business, Elsevier, vol. 130(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Boubacar Camara & Laetitia Lepetit & Amine Tarazi, 2013. "Ex ante capital position, changes in the different components of regulatory capital and bank risk," Applied Economics, Taylor & Francis Journals, vol. 45(34), pages 4831-4856, December.
    2. Matthieu Darracq Paries, 2018. "Financial frictions and monetary policy conduct," Erudite Ph.D Dissertations, Erudite, number ph18-01 edited by Ferhat Mihoubi.
    3. Hans Degryse & Sanja Jakovljević & Steven Ongena, 2015. "A Review of Empirical Research on the Design and Impact of Regulation in the Banking Sector," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 423-443, December.
    4. David Martinez-Miera & Rafael Repullo, 2019. "Monetary Policy, Macroprudential Policy, and Financial Stability," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 809-832, August.
    5. Laurent Clerc & Alexis Derviz & Caterina Mendicino & Stephane Moyen & Kalin Nikolov & Livio Stracca & Javier Suarez & Alexandros P. Vardoulakis, 2015. "Capital Regulation in a Macroeconomic Model with Three Layers of Default," International Journal of Central Banking, International Journal of Central Banking, vol. 11(3), pages 9-63, June.
    6. Isabelle Distinguin & Caroline Roulet & Amine Tarazi, 2012. "Bank regulatory Capital Buffer and Liquidity: Evidence from US and European Publicly Traded Banks," Working Papers hal-00918468, HAL.
    7. Isabelle Distinguin & Clovis Rugemintwari, 2011. "The Role of Market Discipline on Bank Capital Buffer: Evidence from a Sample of European Banks," Working Papers hal-00916739, HAL.
    8. Distinguin, Isabelle & Roulet, Caroline & Tarazi, Amine, 2013. "Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3295-3317.
    9. Badar Nadeem Ashraf & Sidra Arshad & Yuancheng Hu, 2016. "Capital Regulation and Bank Risk-Taking Behavior: Evidence from Pakistan," IJFS, MDPI, vol. 4(3), pages 1-20, August.
    10. Benes, Jaromir & Kumhof, Michael, 2015. "Risky bank lending and countercyclical capital buffers," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 58-80.
    11. Khurram Iftikhar & Syed Faizan Iftikhar, 2018. "The impact of business cycle on capital buffer during the period of Basel-II and Basel-III: Evidence from the Pakistani banks," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 5(04), pages 1-20, December.
    12. Mendicino, Caterina & Nikolov, Kalin & Suarez, Javier & Supera, Dominik, 2020. "Bank capital in the short and in the long run," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 64-79.
    13. Coffinet, Jérôme & Coudert, Virginie & Pop, Adrian & Pouvelle, Cyril, 2012. "Two-way interplays between capital buffers and credit growth: Evidence from French banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(5), pages 1110-1125.
    14. Caterina Mendicino & Kalin Nikolov & Javier Suarez & Dominik Supera, 2018. "Optimal Dynamic Capital Requirements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(6), pages 1271-1297, September.
    15. Ana Kundid Novokmet, 2015. "Cyclicality of bank capital buffers in South-Eastern Europe: endogenous and exogenous aspects," Financial Theory and Practice, Institute of Public Finance, vol. 39(2), pages 139-169.
    16. repec:ipf:finteo:v:39:y:2015:i:3:p:139-169 is not listed on IDEAS
    17. Pool, Sebastiaan & de Haan, Leo & Jacobs, Jan P.A.M., 2015. "Loan loss provisioning, bank credit and the real economy," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 124-136.
    18. de-Ramon, Sebastian J.A. & Francis, William B. & Harris, Qun, 2022. "Bank-specific capital requirements and capital management from 1989-2013: Further evidence from the UK," Journal of Banking & Finance, Elsevier, vol. 138(C).
    19. Syed Moudud-Ul-Huq, 2019. "Banks’ capital buffers, risk, and efficiency in emerging economies: are they counter-cyclical?," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 9(4), pages 467-492, December.
    20. Sebastiaan Pool, 2016. "Credit Defaults, Bank Lending and the Real Economy," DNB Working Papers 518, Netherlands Central Bank, Research Department.
    21. Carvallo Valencia, Oscar & Ortiz Bolaños, Alberto, 2018. "Bank capital buffers around the world: Cyclical patterns and the effect of market power," Journal of Financial Stability, Elsevier, vol. 38(C), pages 119-131.

    More about this item

    Keywords

    banking regulation; minimum capital requirement; countercyclical capital buffer; reserve requirement; (countercyclical or dynamic) loan loss provision; endogenous default; Basel III; DSGE; Uruguay;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ude:wpaper:0917. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Andrea Doneschi or the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/derauuy.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.