Make everything countercyclical

In the euro zone, fiscal policy and monetary policy are clearly highly countercyclical. Unfortunately, however, the regulations governing banks and insurers are procyclical: during recessions, the fall in financial markets and the borrower bankruptcies reduce the capital of financial intermediaries and therefore lead to a contraction in credit supply and, for insurers, a reduction in risky asset holdings. This stems from the regulatory link between financial intermediaries’ level of capital and risky asset holdings. For everything to be countercyclical, regulations for banks and insurers would have to be made countercyclical. This could be done by adapting their capital requirements to the cycle.