Bank of England staff paper finds releasable macroprudential capital buffers support credit in downturns and limit tail bank losses

The Bank of England has published Staff Working Paper No. 1,198, which presents an agent-based model called DeTail to assess the state-contingent tail effects of releasable macroprudential capital buffers. In the paper’s policy experiments, releasing capital buffers during downturns preserves credit supply, reduces household and firm defaults, and limits severe bank losses. Buffer accumulation during upturns is found to impose minimal costs and not significantly constrain lending, supporting the case for active use of releasable buffers over the credit cycle. The framework models heterogeneous firms, households, banks and a central bank in a stock-flow consistent system that generates endogenous credit cycles. It compares a time-varying capital regime with a time-invariant regime, focusing on distributions of credit growth, borrower defaults and bank losses rather than average outcomes alone. Under the time-varying regime, the minimum capital requirement is 8% plus a Countercyclical Capital Buffer-like component that varies with a 48-month exponential backward moving average of real credit growth, with the releasable buffer set at 0% below 6.5%, rising with credit growth, and capped at 2.5% above 20%. The paper finds that the releasable buffer improves lower-tail credit outcomes in downturns, reduces volatility and extreme default events, lowers recapitalisation needs, and modestly shortens contractions while slightly restraining credit booms.