Macroeconomic Effects of Introducing a Capital Conservation Buffer in the Ukrainian Banking Sector

Abstract

The National Bank of Ukraine (NBU) is planning to introduce a capital conservation buffer in the Ukrainian banking sector over a four-year period starting in 2020. This new regulation will yield long-term benefits by strengthening the resilience of the banks, which will reduce the likelihood and costs of financial crises. However, higher capital requirements in the form of a capital conservation buffer can also result in short-term costs by temporarily lowering output. In this study, we use a dynamic general equilibrium model calibrated to fit some long-term features of the Ukrainian economy to evaluate how different implementation strategies affect the short-term output loss. We show that the output loss can be reduced by preannouncing and gradually implementing the buffer, along the lines that have already been advanced by the NBU.