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Bank Capital Requirements, Business Cycle Fluctuations and the Basel Accords: A Synthesis

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  • Inês Drumond

    () (CEMPRE, Faculdade de Economia, Universidade do Porto)

Abstract

In order to survey the mechanisms through which the introduction of Basel II bank capital requirements is likely to accentuate the procyclical tendencies of banking, this paper brings together the theoretical literature on the bank capital channel of propagation of exogenous shocks and the literature on the regulatory framework of capital requirements under the Basel Accords. We conclude that, although the theoretical models that revisit the bank capital channel under the new Accord generally support the Basel II procyclicality hypothesis, this issue is still subject to some debate. In particular, the magnitude of the procyclical effects under Basel II should essentially depend on (i) the composition of banks' asset portfolios, (ii) the approach adopted by banks to compute their minimum capital requirements, (iii) the nature of the rating system used by banks, (iv) the view adopted concerning how credit risk evolves through time, (v) the capital buffers over the regulatory minimum held by the banking institutions, (vi) the improvements in credit risk management, and (vii) the supervisor and market intervention under Basel II.

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Bibliographic Info

Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 277.

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Length: 33 pages.
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:por:fepwps:277

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Keywords: Bank Capital Channel; Basel Accords; Business Cycles; Procyclicality;

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Citations

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Cited by:
  1. Itai Agur & Maria Demertzis, 2011. ""Leaning Against the Wind" and the Timing of Monetary Pollicy," DNB Working Papers 303, Netherlands Central Bank, Research Department.
  2. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2011. "Cyclical Effects of Bank Capital Requirements with Imperfect Credit Markets," Working Papers Series 234, Central Bank of Brazil, Research Department.
  3. Pierre-Richard Agénor & K. Alper & Luiz A. Pereira da Silva, 2011. "Capital Regulation, Monetary Policy and Financial Stability," Working Papers Series 237, Central Bank of Brazil, Research Department.
  4. Agénor, P.-R. & Alper, K. & Pereira da Silva, L., 2009. "Capital requirements and business cycles with credit market imperfections," Policy Research Working Paper Series 5151, The World Bank.
  5. Kauko, Karlo, 2010. "The feasibility of through-the-cycle ratings," Research Discussion Papers 14/2010, Bank of Finland.
  6. David E Allen & Akhmad R. Kramadibrata & R. J. Powell & Abhay Kumar Singh, 2011. "A Quantile Analysis of Default Risk for Speculative and Emerging Companies," Working papers 2011-05, Edith Cowan University, School of Accounting Finance & Economics.
  7. Ines Drumond & José Jorge, 2009. "Basel II Capital Requirements, Firms' Heterogeneity, and the Business Cycle," FEP Working Papers 307, Universidade do Porto, Faculdade de Economia do Porto.
  8. Guangling (Dave) Liu & Nkhahle E. Seeiso, 2011. "Business Cycle and Bank Capital Regulation: Basel II Procyclicality," Working Papers 221, Economic Research Southern Africa.
  9. Javier Gutiérrez Rueda & Angela González Arbeláez & Dairo Estrada, . "Un análisis del exceso de capital de los bancos comerciales en Colombia," Temas de Estabilidad Financiera 052, Banco de la Republica de Colombia.
  10. David E Allen & Robert Powell, 2010. "The Fluctuating Default Risk of Australian Banks," Working papers 2010-02, Edith Cowan University, School of Accounting Finance & Economics.
  11. Roy Zilberman, 2012. "Supply Shocks and the Cyclical Behaviour of Bank Lending Rates under the Basel Accords," Centre for Growth and Business Cycle Research Discussion Paper Series 161, Economics, The Univeristy of Manchester.

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