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Cyclical implications of the Basel II capital standards

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  • Anil Kashyap
  • Jeremy C. Stein

Abstract

This article reviews the economic efficiency implications of the Basel II capital standards. The authors argue that the mapping from measures of loan risk to capital requirements should not be time-invariant, but rather should be allowed to vary with business cycle conditions. They also attempt to assess empirically how much cyclicality in capital requirements might be induced by the current Basel II proposal. They find that the degree of cyclicality can be substantial.

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Bibliographic Info

Article provided by Federal Reserve Bank of Chicago in its journal Economic Perspectives.

Volume (Year): (2004)
Issue (Month): Q I ()
Pages: 18-31

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Handle: RePEc:fip:fedhep:y:2004:i:qi:p:18-31:n:v.28no.1

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Related research

Keywords: Bank capital ; Business cycles;

References

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  1. Joe Peek & Eric S. Rosengren, 1996. "The International Transmission of Financial Shocks: The Case of Japan," Boston College Working Papers in Economics, Boston College Department of Economics 357, Boston College Department of Economics.
  2. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
  3. Michael B. Gordy, 2002. "A risk-factor model foundation for ratings-based bank capital rules," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2002-55, Board of Governors of the Federal Reserve System (U.S.).
  4. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, American Finance Association, vol. 29(2), pages 449-70, May.
  5. Carling, Kenneth & Jacobson, Tor & Linde, Jesper & Roszbach, Kasper, 2007. "Corporate credit risk modeling and the macroeconomy," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 845-868, March.
  6. Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992. "Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance," NBER Working Papers 4015, National Bureau of Economic Research, Inc.
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