Raising CCyBs could have ‘greatly mitigated’ 2008 crisis – St Louis Fed paper

Policy-makers could have avoided a fall in aggregate consumption of 21%, researcher finds
The St Louis Fed
Matthew Black/Flickr

Raising countercyclical capital buffers (CCyB) could have largely prevented the 2008 financial crisis, but not the subsequent recession, a paper published by the Federal Reserve Bank of St Louis finds.

In the paper, Miguel Faria e Castro models the behaviour of the US economy before, during and after the 2008 financial crisis. He then examines whether raising a CCyB would have mitigated some effects of the crisis.

A CCyB is an additional capital buffer that central banks can add to the existing capital requirements when they see that systemic vulnerabilities are meaningfully above normal.

Castro finds that raising the CCyB to 2.5% would have enabled policy-makers to avoid a fall in aggregate consumption of 21%. He says the results suggest the policy could have prevented the economy from entering the “crisis region” altogether.

“The economy would have entered a recession anyway, as the model estimates that the latter part of the recession is mostly attributable to other types of shocks, but the landing would have been much softer,” he says.

Analysing historical crises, Castro finds that raising CCyBs during periods of leverage growth could have reduced the frequency of crises by more than half.

He notes that the model is based only on aggregate consumption and is likely to underestimate the true benefits of CCyB.

  • LinkedIn  
  • Save this article
  • Print this page  

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact [email protected] or view our subscription options here: http://subscriptions.centralbanking.com/subscribe

You are currently unable to copy this content. Please contact [email protected] to find out more.

You need to sign in to use this feature. If you don’t have a Central Banking account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: