CCyB ‘well designed’ to handle next economic downturn, Fed governor asserts

A countercyclical capital buffer (CCyB) is “well designed” to address financial imbalances in the event of another economic downturn (such as the financial crisis beginning in 2007), a member of the Federal Reserve Board said Friday.

In remarks mostly focused on the Fed’s response through monetary policy to the next recession, Gov. Lael Brainard also noted that “it is important to use tools other than monetary policy to temper the financial cycle.”

“In today’s new normal, a combination of strengthened structural safeguards along with countercyclical macroprudential tools is important to enable monetary policy to stay focused on achieving maximum employment and target inflation,” she said.

To that end, Brainard indicated use of the CCyB could be important. (The CCyB is intended to protect banks against losses caused by cyclical systemic risks by requiring capital to be added at times when credit is growing rapidly so that the buffer can be reduced when the financial cycle turns.)

“The countercyclical capital buffer, which was not available before the crisis, is particularly well designed to address financial imbalances over the cycle,” Brainard told the 2020 U.S. Monetary Policy Forum in New York, N.Y.

Federal Reserve Board Gov. Lael Brainard: Monetary Policy Strategies and Tools When Inflation and Interest Rates Are Low