Do capital buffers mitigate volatility of bank lending? A simulation study
AbstractCritics claim that capital requirements can exacerbate credit cycles by restricting lending in an economic downturn. The introduction of Basel 2, in particular, has led to concerns that risksensitive capital charges are highly correlated with the business cycle. The Basel Committee is contemplating a revision of the Basel Accord by introducing counter-cyclical capital buffers. Others claim that capital buffers are already large enough to absorb fluctuations in credit risk. We address the question of the pro-cyclical effects of capital requirements in a general framework which takes into account banks' potential adjustment strategies. We develop a dynamic model of bank lending behavior and simulate different regulatory frameworks and macroeconomic scenarios. In particular, we address two related questions in our simulation study: How do business fluctuations affect capital requirements and bank lending? To what extent does the capital buffer absorb fluctuations in the level of mimimum required capital? --
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Bibliographic InfoPaper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2011,03.
Date of creation: 2011
Date of revision:
Minimum capital requirements; regulatory capital; capital buffer; cyclical lending; pro-cyclicality;
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-16 (All new papers)
- NEP-BAN-2011-04-16 (Banking)
- NEP-CMP-2011-04-16 (Computational Economics)
- NEP-DGE-2011-04-16 (Dynamic General Equilibrium)
- NEP-REG-2011-04-16 (Regulation)
- NEP-RMG-2011-04-16 (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.:
- Dimitrios Tsomocos & Eva Catarineu-Rabell & Patricia Jackson, 2003.
"Procyclicality and the new Basel Accord–banks’ choice of loan rating system,"
FMG Discussion Papers
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- Eva Catarineu-Rabell & Patricia Jackson & Dimitrios P. Tsomocos, 2002. "Procyclicality and the New Basel Accord: banks' choice of loan rating system," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
- Dimitrios P Tsomocos & Eva Catarineu-Rabell, 2003. "Procyclicality and the new Basel Accord - Banks` choice of loan rating system," Economics Series Working Papers 2003-FE-06, University of Oxford, Department of Economics.
- Eva Catarineu-Rabell & Patricia Jackson & Dimitrios P.Tsomocos, 2003. "Procyclicality and the new Basel Accord - Banks' choice of loan rating system," OFRC Working Papers Series 2003fe06, Oxford Financial Research Centre.
- Eva Catarineu-Rabell & Patricia Jackson & Dimitrios P. Tsomocos, 2003. "Procyclicality and the new Basel Accord–banks’ choice of loan rating system," LSE Research Online Documents on Economics 24863, London School of Economics and Political Science, LSE Library.
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