A forward-looking model for time-varying capital requirements and the New Basel Capital Accord
AbstractThis paper proposes a forward-looking model for time-varying capital requirements which finds application within the New Basel Capital Accord (NBCA) framework. The model aims at reconciling two somewhat contrasting objectives of the NBCA proposal: introducing risk-sensitive capital requirements and avoiding at the same time procyclical effects. The model rests on the relationship existing between default rates and the business cycle phases and proposes a modelisation of the default probabilities which is based on a business cycle forecast over the credit horizon. The model is applied to US data over the forecasting period 1971-2002: despite a failure in predicting the early nineties recession, the objective of raising the capital requirements in anticipation of a recessions is in general satisfied. The results obtained are interesting as they suggest that there is room for dampening procyclicality of capital requirements even within a risk-sensitive framework.
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Bibliographic InfoPaper provided by University of Modena and Reggio E., Faculty of Economics "Marco Biagi" in its series Department of Economics with number 0453.
Length: pages 29
Date of creation: Feb 2004
Date of revision:
Publication status: Published in Journal of Banking and Finance, Vl. 29, 12, 2005
capital requirement; default probability; business cycle; procyclicality;
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
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
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