Macroprudential Policy and Downside Risk: Regime-Dependent Effects of Capital Regulation

2026-08-14

AI Summary

This study addresses the asymmetry of capital regulation’s macroeconomic effects and the efficacy of countercyclical buffers by proposing a Threshold Bayesian Vector Autoregression (TBVAR) model. Utilizing a systemic stress index to identify economic regimes, this approach offers a Growth-at-Risk alternative for data-constrained economies. Empirical analysis of Hungary reveals significant state-dependence: releasing capital buffers during stress periods stimulates GDP with effects persisting for approximately 20 months, while accumulation costs during normal periods remain negligible. These findings validate the effectiveness of countercyclical capital buffers in stabilizing growth at minimal cost, providing robust empirical support for macroprudential policy frameworks.

Abstract

This paper employs a Threshold Bayesian Vector Autoregression (TBVAR) to estimate the regime-dependent macroeconomic effects of capital regulation in Hungary. Using the Factor-based Index of Systemic Stress (FISS) as the threshold variable, the model identifies normal and stress regimes consistent with the occasionally binding constraints literature. The TBVAR offers a practical multivariate alternative to Growth-at-Risk for data-constrained economies. Generalised impulse responses reveal a pronounced asymmetry: releasing regulatory capital during stress raises GDP growth at the peak, with effects persisting for roughly twenty months, while the cost of accumulating capital in the normal regime is economically negligible. These findings are robust to alternative Cholesky orderings, sample periods, and credit variable definitions, providing direct empirical support for the countercyclical operation of the capital buffer.

Problem

• Capital Regulation
• Macroprudential Policy
• Downside Risk
• Regime-Dependent Effects
• Countercyclical Capital Buffer

Innovation

• Threshold Bayesian VAR
• Regime-dependent effects
• Capital regulation
• Countercyclical capital buffer
• Systemic stress