Take the counter-cyclical buffer. The idea is simple and compelling. When the regulators identify a bubble developing, this buffer is activated, thereby leading banks to reduce their lending. If all works well, this buffer prevents the exuberances altogether, or at least mitigates it. However, it is not clear how the buffers should be calibrated in order to achieve better financial stability.
The United States experience, empirically documented by Granja, Matvos and Seru (2017), shows that an optimal bidding strategy of a healthier bank – a potential acquirer, which may value the weaker bank for its franchise value from deposits, gets adversely impacted if it is itself poorly capitalized. In such a scenario, the overall value realization for the weak bank goes down.