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Automatic stabilisers in banking capital

July 11, 2019

While banking is procyclical, the capital framework is largely static. The countercyclical capital buffer is discretionary, with potential danger of inaction, and is also limited in scale. This column proposes an expanded capital conservation buffer, which would act as an automatic stabiliser. This could incorporated in the next Basel review and the upcoming Solvency II review.

The banking system is procyclical (Borio 2014). There is strong support for anticyclical macroprudential capital requirements. However, the political economy of activating such anticyclical measures is fraught with difficulties. We, therefore, suggest working more with rule-based capital measures, such as a significantly larger capital conversation buffer than currently required. Banks

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