Departmental Papers

Growing experience since the global financial crisis suggests that there is benefit to both advanced and emerging economies from having releasable capital buffers. Building such buffers in normal times enables policymakers to support lending in the face of shocks irrespective of whether stress was preceded by excessive credit growth. We explore key issues arising in operating such a framework, including when, and to what levels, buffers should be built, when they should be released, and how a release should be communicated to support the supply of credit to the economy. Finally, we examine complementary mechanisms to address procyclicality in banks’ loan supply, including buffers that protect against sectoral risks, bank-specific buffers based on stress tests, and provisioning requirements.