Analysis of cyclical systemic risks in spain and of their mitigation through countercyclical bank capital requirements

Abstract

This paper first identifies the level of cyclical systemic risks in Spain, also calibrating their impact on the solvency of the banking system, and, second, assesses the costs and benefits of the countercyclical use of capital requirements. The first part of the paper is based on an integrated analysis of indicators and other quantitative and qualitative information, while impacts are calibrated using a combination of macroeconomic projection models and stress tests. The second part of the analysis is undertaken using quantile regression models, applied to European data, Bayesian time series models, applied to data for Spain, and a general equilibrium model. The integrated analysis to identify cyclical systemic risks shows the importance of a holistic approach monitoring the different dimensions of these risks, while the impact calibration shows that slight or intermediate materialisation of such risks also involves material capital consumption for the banking sector. The different methodologies applied for cost-benefit analysis find favourable results, in terms of GDP and credit growth, for the activation of releasable capital requirements in situations where cyclical systemic risks are intermediate and high and, notably, for their release in adverse cyclical phases.