Prudential policy treatments to the COVID-19 economic crisis: an assessment of the effects

Abstract Using a dynamic stochastic general equilibrium model (DSGE) model with households’, firms’, and banks’ default calibrated for Portugal, we assess the impact of some prudential policy measures adopted to mitigate COVID-19 economic effects: the flexibility measure and the dividends pay-out restriction. The joint use of the measures reinforces the support for credit achieved using the flexibility measure only and reduces the effort of banks to rebuild capital buffers once the pandemic crisis is over. Given the recovery and the measures’ withdrawal, we also consider distinct paths for replenishing capital buffers. Shorter transitions strengthen banks’ resilience, but longer transitions may be more suitable to ensure a smooth flow of lending to the economy.