Countercyclical capital buffers as national macroprudential tools

Abstract

Capital adequacy requirements imposed on banks may amplify cyclical fluctuations by forcing banks to cut lending in a downturn. One solution would be to tighten capital requirements in an upswing and to ease them in a downswing. A countercyclical capital buffer regime will be introduced in, for instance, the EU as part of the new Capital Requirements Directive. It is difficult to put forward a simple principle according to which additional capital requirements should be imposed. The proposal that has gained the most attention may perhaps not be suitable for an economy like Finland that is sensitive to economic fluctuations.