Our analysis shows that it is cheaper for banks to raise capital during an economic expansion than in a recession. The low hurdle rate for investment in a boom can have a procyclical effect. It encourages credit growth that can further boost economic activity. From a prudential viewpoint, this evidence supports the rationale behind the introduction of countercyclical capital buffer requirements, which increase in booms and decline in busts. This would provide a concrete incentive for banks to build buffers when equity is relatively cheap, rather than having to do so after capital is depleted and the cost of.
