The positive neutral countercyclical capital buffer

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 30 May 2025

Staff Working Paper No. 1,128

By Manuel A. Muñoz and Frank Smets

We reconcile theory and recent evidence on the benefits of building releasable bank capital buffers when there is headroom for doing so by building a quantitative macro-banking model that provides a rationale for static bank capital requirements and dynamic capital buffers due to externalities arising from bank risk failure and collateral constraints. Optimal dynamic capital buffers gradually build in response to expected upward shifts in bank net interest margins and mitigate the two types of externalities. Absent pecuniary externalities due to collateral constraints, these capital buffers are ineffective. The model also captures previous empirical findings such as the negative effect of a capital requirement tightening on short-term lending and the optimality of setting static bank capital requirements at relatively conservative levels. We present an application of our quantitative analysis in the form of a simple framework for calibrating the so-called ‘positive neutral counter-cyclical capital buffer’ (PN-CCyB).

This version was updated in July 2025.

The positive neutral countercyclical capital buffer