Economic Insights — Post-2007 capital regulation tries to ensure that banks are well-capitalized. Do banks' capital decisions make them stronger or more fragile when the economy faces a downturn?
As GDP grows faster, capital ratios at the largest banks tend to fall, and this drives the results across the entire industry. But at the smallest banks, the relationship is procyclical: As GDP grows faster, small-bank capital ratios tend to also rise. These results provide some support for efforts to pursue more targeted financial regulation.
This article appeared in the First Quarter 2021 edition of Economic Insights. Download and read the full issue.
