Impacts of financial regulation on the cyclicality of banks’ capital requirements and on financial stability
AbstractOne of the main functions of the central bank is to strengthen the stability of the financial system, an important aspect of which is to take an active part in the legislation process to improve the regulatory environment and to assess the potential impacts of new regulatory measures. In the summer of 2007 substantial changes took place in the governance of financial institutions with the introduction of regulations based on the new Basel capital standards (Basel II). The objective of this study is to investigate the likely consequences of such new bank regulations and their potential impact on financial stability. To this end, the study analyses the foreseeable developments in the cyclicality of capital requirements of banks based on the corporate credit portfolio of internationally active large banks, and points out that bank regulations are not always capable of fulfilling their intended function of enhancing financial stability in times of economic distress. Notably, the prospective increase in the cyclicality of capital requirements could well lead to a deepening of economic problems and to instability in the banking system, if the banking system appears undercapitalised relative to the risks assumed. All of this highlights the need for the development of a forward-looking risk assessment system and a supportive regulatory regime providing proper incentives.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Magyar Nemzeti Bank (the central bank of Hungary) in its journal MNB Bulletin.
Volume (Year): 2 (2007)
Issue (Month): 2 (November)
Basel II; credit risk; capital requirement; regulation; cyclicality; financial stability.;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Balázs Zsámboki, 2007. "Basel II and financial stability: An investigation of sensitivity and cyclicality of capital requirements based on QIS 5," MNB Occasional Papers 2007/67, Magyar Nemzeti Bank (the central bank of Hungary).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maja Bajcsy).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.