December 2022 issue contents
The Impact of Capital Requirements on the Macroeconomy: Lessons from Four Macroeconomic Models of the Euro Area

Matthieu Darracq Pari├Ęs, Peter Karadi, Christoffer Kok and Kalin Nikolov, European Central Bank 

Abstract

This paper examines the impact of higher bank capital requirements on the real economy. We find, using a range of macroeconomic models used at the European Central Bank, that, in the long run, a 1 percent bank capital requirement increase has a small impact on real activity. In the short run, GDP declines by 0.15 to 0.35 percent. When banks are able to reduce their voluntary capital buffers and dividend payouts and when monetary policy reacts strongly to inflation deviations from target, the real impact of higher capital requirements is significantly reduced.

JEL Code: G28, E54.