In this way, capital requirements would moderate the ups and downs of the credit cycle – the reverse of what currently happens – reducing the risk of a future crisis. This macroprudential approach to capital requirements is tremendously important, but it is also complex, with a number of practical and logistical concerns.
Such a system could be accomplished by linking capital requirements to movements in credit-cycle indicators, such as loan growth and asset prices. For example, our research on the determinants of financial stress that I mentioned a moment ago can help inform the development of such regulatory guidelines. It is probably unrealistic to think that ex ante a perfect formula can be derived.