In the scorched-earth aftermath of the financial crisis, regulators were looking for novel ways to avoid a repeat of the carnage they had just lived through. Capital buffers — war chests of reserves specifically designed to help banks navigate the highs and lows of their businesses — seemed to offer just that.
A decade on, buffers are largely seen to have just failed their first test in the aftermath of the Covid-19 pandemic. They did provide some assurance to investors but did not unleash extra credit to the economy in a period of stress, leaving regulators scrambling to come up with a fix in an area fraught with market and political sensitivities.
It’s easy to see why the buffers were attractive to regulators back in the day.
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