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The 2008 financial crisis exposed a longstanding problem in financial regulation: traditional regulatory strategies tend to be procyclical. That is, regulatory tools—most notably, bank capital requirements—incentivize excessive credit growth during economic expansions and insufficient lending during contractions. The procyclicality of U.S. financial regulation was a key driver of the housing bubble in the mid-2000s and the massive credit crunch that followed. To combat this phenomenon, Congress and the federal banking agencies attempted to mitigate procyclical boom-and-bust cycles by implementing regulatory approaches that were explicitly countercyclical. The Dodd-Frank Act and related post-crisis reforms included several countercyclical features that were designed to become stricter during periods of economic growth and more lenient during contractions, with the goal of smoothing economic cycles.

Less than a decade later, however, these countercyclical tools failed to prevent unprecedented financial stress during the COVID-19 recession. This Article is the first legal scholarship to revisit the design of countercyclical rules in light of the COVID-19 pandemic. It reveals weaknesses in Dodd-Frank’s countercyclical approach and the significant costs of failing to implement an effective countercyclical strategy. The Article also establishes a blueprint for strengthening the United States’ countercyclical framework going forward. The Article identifies three principles—automaticity, portfolio strategy, and market-wide coverage—that should guide countercyclical policymaking. It then applies these principles to five specific areas in which financial regulators should bolster countercyclical oversight: bank capital requirements, accounting standards, securitization rules, early remediation guidelines, and margin requirements. Taken together, these reforms are critical to making countercyclical financial regulation work and creating a more stable and prosperous financial system.