Board of Governors of the Federal Reserve System
06/22/2026 | Press release | Distributed by Public on 06/22/2026 14:21
A Static Capital Buffer is Hard To Beat
June 2026
A Static Capital Buffer is Hard To Beat
Matthew Canzoneri, Behzad Diba, Luca Guerrieri, and Arsenii Mishin
Abstract:
In a model with endogenous risk-taking, deposit insurance and limited liability may lead banks to make risky loans that are socially inefficient. Capital requirements can prevent excessive risk-taking at the cost of reducing liquidity-producing bank deposits. A policy that sets capital requirements just high enough to prevent excessive risktaking will move capital requirements pro-, counter-, or a-cyclically depending on the shock source. However, such a policy requires full knowledge of all the shocks hitting the economy and is not implementable. Simple rules that respond to cyclical conditions-in line with Basel III guidance-perform poorly, whereas a small static capital buffer can do much better.
Keywords: Banks, capital requirements, endogenous risk-taking, crises
DOI: https://doi.org/10.17016/FEDS.2026.042
PDF: Full Paper
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