Procyclical Capital Rules and the Economy’s Discontent
In our recent paper outlining the holistic-capital regime regulators should quickly deploy, we noted that current rules are often counter-productive to their avowed goal of bank solvency without peril to prosperity. However, one acute problem in the regulatory-capital rulebook – procyclicality – does particularly problematic damage when the economy faces acute challenges – i.e., now. None of the pending one-off capital reforms addresses procyclicality and, in fact, several might make it even worse. This memo shows how and then what should be quickly done to reinstate the counter-cyclicality all the regulators say they seek.