There is a tenuous predictive relationship between the ratio of nonfinancial credit to GDP and GDP two years ahead. Setting bank capital requirements following a simple rule based on the credit-to-GDP ratio is not a good idea in our model even if the model encapsulates a predictive relationship in line with the observed data.
A Static Capital Requirement is Hard to Beat
Rules that respond to cyclical conditions fail to prevent excessive risk taking, whereas a static capital buffer performs nearly as well as the Ramsey rule.