Safe and sound banking : a role for countercyclical regulatory requirements ?
AbstractMost explanations of the crisis of 2007-2009 emphasize the role of the preceding boom in real estate and asset markets in a variety of advanced countries. As a result, an idea that is gaining support among various groups is how to make Basel II or any regulatory regime less pro-cyclical. This paper addresses the rationale for and likely contribution of such policies. Making provisioning (or capital) requirements countercyclical is one way potentially to address pro-cyclicality, and accordingly it looks at the efforts of the authorities in Spain and Colombia, two countries in which countercyclical provisioning has been tried, to see what the track record has been. As explained there, these experiments have been at best too recent and limited to put much weight on them, but they are much less favorable for supporting this practice than is commonly admitted. The paper then addresses concerns and implementation issues with countercyclical capital or provisioning requirements, including why their impact might be expected to be limited, and concludes with recommendations for developing country officials who want to learn how to make their financial systems less exposed to crises.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 5198.
Date of creation: 01 Feb 2010
Date of revision:
Banks&Banking Reform; Access to Finance; Financial Intermediation; Debt Markets; Emerging Markets;
Other versions of this item:
- Gerard Caprio, 2009. "Safe and Sound Banking: A Role for Countercyclical Regulatory Requirements?," Department of Economics Working Papers 2009-06, Department of Economics, Williams College.
- Gerard Caprio, Jr, . "Safe and Sound Banking: A Role for Countercyclical Regulatory Requirements?," The Institute for International Integration Studies Discussion Paper Series iiisdp311, IIIS.
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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