Financial entities have been subject to risk-based capital requirements for many years. The experiences of the recent financial crisis led to heightened criticism that these rules are pro-cyclical, meaning they require insufficient capital during economic booms and excessive capital during...

Motivated by the Great Recession in 2008, countercyclical capital regimes are now being considered by financial regulators. Here we offer both a specific design of a countercyclical capital regime and present an empirical examination of how it might have worked had it been applicable to Fannie...