This is sought to be mitigated through the requirement of a countercyclical capital buffer which will be built up during the upswing of the economic cycle to be drawn down if there is a system wide risk in the downturn.
The risk in the spatial dimension arises from the behaviour and business models of large financial institutions which, because of interconnections among financial institutions, can have a disproportionately large systemic impact. The moral hazard of “too big to fail” is therefore sought to be mitigated by requiring systemically important financial institutions (SIFIs) to hold higher loss absorbing capital.