Market stigma and bank capital
September 29, 2022
The Great Financial Crisis exposed vulnerabilities in the quality and quantity of banks’ capital. It was the catalyst for increasing regulatory capital requirements, including the introduction of macroprudential buffers that can be used during economic downturns to incentivize banks to continue providing credit to the economy instead of engaging in excessive de-leveraging or de-risking behaviors. However, market pressure to maintain or even increase capital ratios can constrain banks in using their buffers during economic downturns.