This conservation buffer is to be complemented by a countercyclical buffer, which would vary over time. It should be at its maximum in periods when credit is growing rapidly and system-wide risks are rising. In times of stress, the buffer would be reduced to ensure that the flow of credit is not undermined by regulatory constraints.
The goal is to make financial systems less vulnerable to booms and busts so that crises are less frequent and less severe. Through evidence-based analysis, policy-makers can determine the package of reforms that will maximise these net economic benefits. It is to this issue that I will now turn.