We study the macroprudential roles of bank capital regulation and monetary policy in a borrowing cost channel model with endogenous …nancial frictions, driven by credit risk, bank losses and bank capital costs. These frictions induce …nancial accelerator mechanisms and motivate the examination of a macroprudential toolkit. Following credit shocks, countercyclical regulation is more e¤ective than monetary policy in promoting price, …nancial and macroeconomic stability. For supply shocks, combining macroprudential regulation with a stronger anti-in ‡ationary policy stance is optimal. The …ndings emphasize the importance of the Basel III accords in alleviating the output-in ‡ation trade-o¤ faced by central banks, and cast doubt on the desirability of conventional (and unconventional) Taylor rules during periods of …nancial distress.