capital constraints

Capital Constraints, Lending over the Cycle and the Precautionary Motive: A Quantitative Exploration

In the wake of the financial crisis, financial regulators have developed new tools. Among these tools are countercyclical capital buffers, which aim to decrease the procyclicality of bank lending. The idea is that capital buffers should rise in good times, to build up high levels of equity capital. Then in bad times, capital requirements can be loosened, to encourage banks to lend more during the downturn, in an attempt to stimulate the economy.