Agent-based model shows releasable buffers stabilize credit
A new European Central Bank working paper introduces the DeTail agent-based framework to evaluate state-contingent tail effects of releasable macroprudential capital buffers. The study finds that releasing buffers during downturns preserves credit supply and mitigates bank losses.
Mapping the tail of credit cycles
The authors develop an agent-based framework termed DeTail to assess state-contingent tail effects of time-varying macroprudential capital requirements.
Integrating heterogeneous firms, households, and banks within a stock-flow consistent structure, the model generates endogenous credit cycles without external shocks.
Policy simulations reveal that buffer releases during economic downturns mitigate negative credit growth and preserve credit supply.
Furthermore, active buffer management attenuates severe household and firm default events while limiting upper-tail bank losses.
Crucially, buffer accumulation during upturns imposes minimal economic costs and avoids constraining aggregate lending prematurely.
Extending the macro-financial framework
The framework extends previous endogenous credit cycle models by incorporating a housing market with mortgage borrowing and multiple heterogeneous banks subject to risk-based capital requirements.
This design addresses post-pandemic policy debates regarding bank reluctance to use buffers due to stigma concerns.
By evaluating policy-induced changes across full probability distributions rather than averages, the research provides granular insights for macroprudential authorities aiming to enhance systemic resilience.
Compelling mechanics, unproven friction
The study offers a sophisticated methodological leap by focusing on tail risks instead of linear averages.
Yet, assuming orderly bank resolutions glosses over the market stigma that paralyzed buffers during COVID-19. Policymakers should treat these theoretical resilience gains with cautious optimism.