Buffers should not be rebuilt too quickly – Bank of Canada paper

Requirements should be lower during crisis recovery to avoid bank default, researcher argues

Bank of Canada facade

Capital buffers are most useful if banks are not required to rebuild them quickly after crises, a working paper published by the Bank of Canada finds.  

In the paper, Josef Schroth studies the different bank capital requirements with a model “comparing the competitive-equilibrium allocation with the constrained-efficient allocation.”

He finds that the optimal regulation requires banks to hold more equity capital when loan supply is high during “good times”. But it also allows banks to hold

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