Executive Summary
In the aftermath of the financial crisis, regulators around the world revised their rules to address what was widely perceived to be one of the major causes of the crisis, namely the tendency for banks to behave procyclically by taking on more and higher-risk lending in economic upturns and doing the opposite in recessions.
The resulting rules, known as the Basel III reforms, have created, among other things, an expectation that banks will lean against the economic cycle by building capital through what are called conservation and countercyclical capital buffers, the latter being simply an additional conservation buffer. These buffers would dampen lending in an upturn, helping avoid excessive speculation and precarious positions, while supporting lending in a downturn to help reboot the economy. To date, the rules have not been uniformly applied to credit unions.
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