6 - From the Global to the Local

Summary

Chapter 6 traces the implementation of the most prominent anti-cyclical element into the global regulatory overhaul post-crisis, namely the countercyclical capital buffer, the only anti-cyclical regulatory tool in the global Basel III regulation. As I show, operationalizing this tool and executing the countercyclical mandate required the creation of robust early warning systems that could detect and signal the buildup of cyclical systemic risks sufficiently ahead of time in order to enable timely preventive action. The chapter traces the work of applied economists in the three central banks under study, showing how their decade-long research effort provided such monitoring frameworks, which not only provided robust signals but also shifted the academic scientific discourse on this issue, providing the stylized facts that challenged a sanguine view of financial markets. The study at the same time finds that these early warning frameworks were often implemented in the design of stress tests, allowing central bank policymakers to engage in discretionary countercyclical action without overtly exposing themselves to the politicization of these acts.