One example is the countercyclical capital buffer in Basel III, which provides for an increase in the risk-weighted capital requirements of prudentially regulated banking organizations of up to 2-1/2 percentage points when “credit growth is excessive and is leading to the buildup of system-wide risk.”10 Because stricter capital requirements lead to higher levels of bank equity – which is typically more expensive than debt – they would likely result in higher funding costs for the bank-intermediated credit utilized by other market participants.
In this regard, time-varying macroprudential policies can be thought of as addressing cyclical systemic risks via interest rates in a manner somewhat akin to a tightening of monetary policy, which by raising benchmark interest rates affects a similar increase in funding costs. Clearly, time-varying macroprudential policies could not be viewed as a substitute for monetary policy.