From the Wall Street Journal this week:
“Some Fed officials want to use one of the regulatory tools the central bank developed after the crisis, called a countercyclical capital buffer. It can require the U.S.’s largest banks to sock away additional capital during good times so they have more to fall back on when loans go bad during bad times, like socking oil away in the nation’s strategic petroleum reserve.”
This is something that everyone should do regardless of regulation. Not just banks. Not just companies. Everyone.
There are three faithful friends – an old wife, an old dog, and ready money.
People do this already with predictable cycles. Many businesses and family budgets are use to seasonal variations. When a farm sells its crop in the fall, they do not go out and blow it all thinking that next month will be the same. It is a predictable annual cycle. Multi-year cycles are harder for people to plan for. Especially if it is of an unknown duration. It isn’t as tangible. It is like saving for retirement. Even if they know it is inevitable, it is a long way off and so it takes a back seat.
Continuing with the farm analogy, when you get a bumper crop, set some aside for a drought year. This is a best practice that takes discipline. The hard question isn’t if you should have a “countercyclical capital buffer”, it’s how big should it be?
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