Norwegian banks in a recession: Procyclical implications of Basel II
AbstractWhile the new capital adequacy framework, Basel II, aims to make the banks’ capital requirements more sensitive to the underlying risk of the assets, it may also introduce an additional source of procyclicality in the banking sector. A growing share of the literature has assessed the potential cyclicality of Basel II. However, only parts of the banks’ assets have been considered. In addition, the cyclicality of the capital positions is usually left out of the calculations. This paper applies the stress testing framework of Norges Bank to analyse the cyclicality of capital positions and the cyclicality of Basel II capital requirements for the entire bank portfolio of Norwegian banks. We find a substantial increase in the calculated Basel II capital requirements in a recession scenario for the Norwegian economy. We also find a negative co-movement between capital positions and Basel II capital requirements. Hence, our analysis demonstrates that Basel II may introduce an additional source of procyclicality.
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Bibliographic InfoPaper provided by Norges Bank in its series Working Paper with number 2009/04.
Length: 32 pages
Date of creation: 13 Mar 2009
Date of revision:
Basel II; procyclicality; capital positions;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- 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
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-28 (All new papers)
- NEP-BAN-2009-03-28 (Banking)
- NEP-CBA-2009-03-28 (Central Banking)
- NEP-EEC-2009-03-28 (European Economics)
- NEP-MAC-2009-03-28 (Macroeconomics)
- NEP-REG-2009-03-28 (Regulation)
- NEP-RMG-2009-03-28 (Risk Management)
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