The Countercyclical Capital Buffer Of Basel Iii: A Critical Assessment
AbstractWe provide a critical assessment of the countercyclical capital buffer in the new regulatory framework known as Basel III, which is based on the deviation of the credit-to-GDP ratio with respect to its trend. We argue that a mechanical application of the buffer would tend to reduce capital requirements when GDP growth is high and increase them when GDP growth is low, so it may end up exacerbating the inherent pro-cyclicality of risk-sensitive bank capital regulation. We also note that Basel III does not address pro-cyclicality in any other way. We propose a fully rule-based smoothing of minimum capital requirements based on GDP growth.
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Bibliographic InfoPaper provided by CEMFI in its series Working Papers with number wp2011_1102.
Date of creation: Mar 2011
Date of revision:
Bank capital regulation; Basel III; Pro-cyclicality; Business cycles; Credit crunch.;
Other versions of this item:
- Repullo, Rafael & Saurina, Jesús, 2011. "The Countercyclical Capital Buffer of Basel III: A Critical Assessment," CEPR Discussion Papers 8304, C.E.P.R. Discussion Papers.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-02 (All new papers)
- NEP-MAC-2011-04-02 (Macroeconomics)
- NEP-REG-2011-04-02 (Regulation)
- NEP-RMG-2011-04-02 (Risk Management)
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