Macroprudential supervision policies try to prevent a leverage cycle by changing capital requirements so that they ________ during an expansion and ________ during a downturn.
A)increase;decrease
B)increase;increase
C)decrease;increase
D)decrease;decrease

Question

Quizplus · Accepted Answer

By increasing capital requirements during an expansion, banks are forced to hold more capital in relation to their risky assets, which serves to limit their ability to take on excessive leverage. During a downturn, the capital requirements are decreased to ease some of the pressure on banks and encourage them to lend more. This prevents a leverage cycle from forming, where banks become overly optimistic during a boom and take on too much risk, leading to a subsequent bust.

Macroprudential Supervision Policies Try to Prevent a Leverage Cycle by Changing