Although current financial conditions are stable, the bank regulator has decided to introduce a counter-cyclical capital buffer
Question:
- Although current financial conditions are stable, the bank regulator has decided to introduce a counter-cyclical capital buffer (CCyB) to be able to manage systemic risk from excessive credit growth in the future, and has sent a draft of the proposed regulation to the banks for consultation. The draft regulation envisages setting the neutral rate of the CCyB to 1.5%.
The bankers are furious: they point out that they have been prudent in their lending, the credit-to-GDP ratio is at about its historical average, and current financial conditions are stable. Under these circumstances, the increase in capital requirements implied by the introduction of the CCyB at 1.5% is not justified. Moreover, they argue that the higher cost of capital would be passed on to borrowers via higher lending rates, depressing credit and growth. They propose instead setting the neutral rate to zero, and raising it in the future if financial conditions deteriorate.
You are a respected professor of finance, and the leading financial newspaper has asked you to write an op-ed on this issue. Provide a first draft of your op-ed, taking a position and explaining your arguments.