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Pro-cyclicality of capital regulation: is it a problem? How to fix it?

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Author Info

  • Paolo Angelini

    ()
    (Banca d'Italia)

  • Andrea Enria

    ()
    (Banca d'Italia)

  • Stefano Neri

    ()
    (Banca d'Italia)

  • Fabio Panetta

    ()
    (Banca d'Italia)

  • Mario Quagliariello

    ()
    (Banca d'Italia)

Abstract

We use a macroeconomic euro area model with a bank sector to study the pro-cyclical effect of the capital regulation, focusing on the extra pro-cyclicality induced by Basel II over Basel I. Our results suggest that this incremental effect is modest. We also find that regulators could offset the extra pro-cyclicality by a countercyclical capital-requirements policy. Our results also suggest that banks may have incentives to accumulate countercyclical capital buffers, making this policy less relevant, but this finding is depends on the type of economic shock posited. We also survey different policy options for dealing with procyclicality and discuss the pros and cons of the measures available.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Questioni di Economia e Finanza (Occasional Papers) with number 74.

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Date of creation: Oct 2010
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Handle: RePEc:bdi:opques:qef_74_10

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Web page: http://www.bancaditalia.it
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Related research

Keywords: Basel accord; pro-cyclicality;

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References

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  1. F. Degraeve, 2007. "The External Finance Premium and the Macroeconomy: US post-WWII Evidence," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/482, Ghent University, Faculty of Economics and Business Administration.
  2. Fiorella De Fiore & Oreste Tristani, 2013. "Optimal Monetary Policy in a Model of the Credit Channel," Economic Journal, Royal Economic Society, vol. 123(571), pages 906-931, 09.
  3. Aliaga-Díaz, Roger & Olivero, María Pía, 2010. "Is there a financial accelerator in US banking?: Evidence from the cyclicality of banks' price-cost margins," Economics Letters, Elsevier, vol. 108(2), pages 167-171, August.
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Cited by:
  1. Liu, Guangling (Dave) & Seeiso, Nkhahle E., 2012. "Basel II procyclicality: The case of South Africa," Economic Modelling, Elsevier, vol. 29(3), pages 848-857.
  2. Michal Brzoza-Brzezina & Marcin Kolasa, 2013. "Bayesian evaluation of DSGE models with financial frictions," Working Papers 71, Department of Applied Econometrics, Warsaw School of Economics.
  3. Paolo Angelini & Stefano Neri & Fabio Panetta, 2011. "Monetary and macroprudential policies," Temi di discussione (Economic working papers) 801, Bank of Italy, Economic Research and International Relations Area.
  4. Paolo Angelini & Laurent Clerc & Vasco Cúrdia & Leonardo Gambacorta & Andrea Gerali & Alberto Locarno & Roberto Motto & Werner Roeger & Skander Van den Heuvel & Jan Vlcek, 2011. "Basel III: Long-term impact on economic performance and fluctuations," Questioni di Economia e Finanza (Occasional Papers) 87, Bank of Italy, Economic Research and International Relations Area.
  5. : Gianni De Nicolo & : Andrea Gamba & : Marcella Lucchetta, 2013. "Microprudential Regulation in a Dynamic Model of Banking," Working Papers wpn13-04, Warwick Business School, Finance Group.
  6. Karmakar, Sudipto, 2013. "Macroprudential Regulation and Macroeconomic Activity," MPRA Paper 52172, University Library of Munich, Germany.
  7. Guangling (Dave) Liu & Nkhahle E. Seeiso, 2011. "Business Cycle and Bank Capital Regulation: Basel II Procyclicality," Working Papers 221, Economic Research Southern Africa.
  8. Michał Brzoza-Brzezina & Marcin Kolasa & Krzysztof Makarski, 2011. "The anatomy of standard DSGE models with financial frictions," National Bank of Poland Working Papers 80, National Bank of Poland, Economic Institute.
  9. International Monetary Fund, 2012. "Dynamic Loan Loss Provisioning: Simulations on Effectiveness and Guide to Implementation," IMF Working Papers 12/110, International Monetary Fund.

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