Systemic risk, countercyclical capital, and stress tests: Macroprudential policy in a macroeconomic model

Sammanfattning: The financial crisis has shown that better macroprudential regulation is needed to counteract systemic risk in the financial system. In addition to the Basel III requirements, macroprudential stress tests are being developed to address system-wide imbalances. However, while recent research has advanced the modelling of financial frictions and the empirical analysis of macroprudential policy, modelling of macroprudential tools such as capital requirements and stress tests has barely progressed. Therefore, I assess the effectiveness of stress tests and countercyclical capital buffers using a macroeconomic model, where systemic risk creates crises. To analyse macroprudential policy, I perform a welfare analysis where a financial authority targets leverage. I find that macroprudential policy increases welfare through reducing systemic risk and raising total wealth. A regime with only countercyclical capital requirements raises welfare more than a regime with only stress tests, but a combined regime is best, raising welfare by 3.23%.