Basel II and the Capital Requirements Directive: Responding to the 2008/09 Financial Crisis
AbstractThis paper addresses factors which have prompted the need for further revision of banking regulation, with particular reference to the Capital Requirements Directive. The Capital Requirements Directive (CRD), which comprises the 2006/48/EC Directive on the taking up and pursuit of the business of credit institutions and the 2006/49/EC Directive on the capital adequacy of investment firms and credit institutions, implemented the revised framework for the International Convergence of Capital Measurement and Capital Standards (Basel II) within EU member states. Pro cyclicality has attracted a lot of attention – particularly with regards to the recent financial crisis, owing to concerns arising from increased sensitivity to credit risk under Basel II. This paper not only considers whether such concerns are well-founded, but also the beneficial and not so beneficial consequences emanating from Basel II’s increased sensitivity to credit risk (as illustrated by the Internal Ratings Based approaches). In so doing it considers the effects of Pillar 2 of Basel II, namely, supervisory review, with particular reference to buffer levels, and whether banks’ actual capital ratios can be expected to correspond with Basel capital requirements given the fact that they are expected to hold certain capital buffers under Pillar 2. Furthermore, it considers how regulators can respond to prevent systemic risks to the financial system during periods when firms which are highly leveraged become reluctant to lend. In deciding to cut back on lending activities, are the decisions of such firms justified in situations where such firms’ credit risk models are extremely and unduly sensitive - hence the level of capital being retained is actually much higher than minimum regulatory Basel capital requirements ?
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 17379.
Date of creation: 18 Sep 2009
Date of revision:
Basel II; Capital Requirements Directive; pro cyclicality; risk; regulation; banks;
Find related papers by JEL classification:
- E0 - Macroeconomics and Monetary Economics - - General
- D0 - Microeconomics - - General
- K2 - Law and Economics - - Regulation and Business Law
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
This paper has been announced in the following NEP Reports:
- NEP-ACC-2009-09-26 (Accounting & Auditing)
- NEP-ALL-2009-09-26 (All new papers)
- NEP-BAN-2009-09-26 (Banking)
- NEP-REG-2009-09-26 (Regulation)
- NEP-RMG-2009-09-26 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ojo, Marianne, 2009.
"Central bank’s role and involvement in bank regulation: Lender of last resort arrangements and the Special Resolution Regime (SRR),"
15771, University Library of Munich, Germany.
- Ojo, Marianne, 2009. "Central bank’s role and involvement in bank regulation: Lender of last resort arrangements and the Special Resolution Regime (SRR)," MPRA Paper 33670, University Library of Munich, Germany, revised Sep 2011.
- Costa Cabral, Nazare, 2010.
"Breve guia temático e bibliográfico sobre o estudo da actual crise financeira e económica
[Short thematic guide to the study of current financial and economic crisis]," MPRA Paper 20743, University Library of Munich, Germany.
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