Using the Countercyclical Capital Buffer: Insights from a structural model

This Letter looks at what happens after a demand-induced economic expansion with and without the activation of the Countercyclical Capital Buffer (CCyB). The main findings are that without the activation of the CCyB, bank resilience is diminished for an extended period. A timely activation of the CCyB alleviates the short-run decrease in bank resilience and enhances it in the medium-to-long term without substantially reducing economic expansion. If the activation is delayed, the reduced bank resilience persists longer. The cost of incorrectly timing the tightening of the CCyB is small. The macroeconomic impact of tightening is smaller the further above banks’ actual capital ratios are from their regulatory minimum requirement.