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

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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