Third, in situations of very high (and perhaps rising) debt-to-GDP ratios, markets may build a premium into interest rates to cover the perceived probability that debt will be monetized. Lower debt ratios reverse this effect.
Many mature economies are currently experiencing buoyant economic conditions, output gaps have been closed in many cases, and cyclical risks in the financial system are mounting. Financial institutions with higher levels of capital are more robust and thus also make the financial system as a whole more resilient. If all market participants have strong defences, the risk of contagion falls.