Which of the following best explains how a regulatory requirement for commercial banks to increase their capital adequacy ratio (CAR) is intended to reduce systemic risk, and its potential short-run macroeconomic trade-off?
It increases the proportion of highly liquid assets held by banks to meet sudden, unexpected cash withdrawals, but this reduces the funds available for long-term business investment.
It increases the buffer of equity and reserves available to absorb losses from defaulting assets, making banks more resilient to insolvency, but it can contract credit supply and reduce economic growth.
It enforces a strict limit on a bank's total non-risk-weighted lending relative to its equity capital, which guarantees retail bank profitability but increases the risk of systemic failure.
It requires banks to increase their interest-bearing cash reserves held directly at the central bank, which lowers the policy interest rate but increases the cost of government debt servicing.
