Don’t count on buffers

Risk analysis


Most of the discussion surrounding the pro-cyclical implications of risk-sensitive regulatory capital rules has focused on required capital. Naturally, however, few institutions hold just the bare minimum capital required by regulators. To do so would subject them to undesirable regulatory and market sanctions should an unexpected shock push their capital below the minimum. This raises the question of how capital buffers (the excess of actual capital over the minimum regulatory requirement)

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