Banks, Rules, and Crises: The Timing Is Everything

What if financial stability depends not on stricter rules, but on smarter timing? This research by Brittany Lewis finds that the most effective banking regulations shift with the business cycle — loosening when recovery is needed and tightening when the economy runs hot.

The study reveals that the optimal policy must be dynamic, not rigid. When the economy is struggling after a financial crisis, regulators should be lenient. Being too strict at that point risks throttling the capital flow needed for businesses to recover, causing long-term inefficiency.

Conversely, during prosperous times, rules must be restrictive to build a safety cushion that prevents banks from reckless risk-taking. Ultimately, the research shows that the most effective way to protect the financial system is through smart, flexible regulation that changes with the business cycle.

Associated Research

“Bank Leverage Restrictions in General Equilibrium: Solving for Sectoral Value Functions”
(Journal of Risk and Financial Management, 2025)