We study how a bank allocates capital across its business units when facing multiple constraints over several periods. If a constraint tightens – be it because of stricter regulation or higher risk – capital flows to the more efficient unit, i.e. the unit offering a higher marginal return on required capital. Relative efficiency helps explain how a policy measure targeting a specific business unit – e.g. imposing requirements for market risk, or ring-fencing lending – spills over to another, seemingly unrelated unit. It also helps explain the bank’s response to the tightening of a constraint that is contemporaneously slack but likely to bind later on.

Rapid growth of stablecoins has raised concerns about issuer default and spillover risks. To assess these risks, we model a stablecoin issuer facing persistent demand shocks. Absent regulation, the issuer holds little capital and favours interest-bearing but illiquid bonds over cash. This exposes coin-holders to default risk and poses spillovers via bond fire-sales. How can regulation mitigate these risks? Capital and liquidity thresholds can help, especially when introduced as usable buffers. The thresholds can be breached, providing flexibility. However, breaches trigger additional redemptions that discipline the issuer. The thresholds operate through asymmetric channels: the liquidity threshold raises only cash, whereas the capital threshold increases both capital and cash. Both thresholds mitigate default and spillover risks, making them substitutes when either risk is targeted separately but complements when both risks are targeted jointly. We provide a two-way mapping that helps derive capital-liquidity threshold combinations implied by chosen risk targets (and vice-versa).