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Are risk weights of banks in the Czech Republic procyclical? Evidence from wavelet analysis

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  • Václav Brož

    (Institute of Economic Studies, Charles University, and Czech National Bank, Prague, Czech Republic)

  • Lukáš Pfeifer

    (Czech National Bank and University of West Bohemia, Faculty of Economics, Prague, Czech Republic)

Abstract

We analyze the cyclicality of risk weights of banks in the Czech Republic from 2008 to 2016. We differentiate between risk weights under the internal ratings-based and those under the standardized approach, consider the financial cycle, and employ wavelet coherence as a means of dynamic correlation analysis. Our results indicate that the risk weights of exposures under the internal ratings-based approach, including risk weights related to exposures secured by real estate collateral, are procyclical with respect to the financial cycle. We also show that the effect of changing asset quality on risk weights is present for the internal ratings-based approach, in line with our expectations based on regulatory standards. Our results can be employed for the purposes of decision-making on the activation of supervisory and macroprudential instruments, including the countercyclical capital buffer.

Suggested Citation

  • Václav Brož & Lukáš Pfeifer, 2021. "Are risk weights of banks in the Czech Republic procyclical? Evidence from wavelet analysis," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(1), pages 113-139.
    • Handle: RePEc:cbk:journl:v:10:y:2021:i:1:p:113-139
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    Cited by:

    1. Pfeifer, Lukáš & Hodula, Martin, 2021. "A profit-to-provisioning approach to setting the countercyclical capital buffer," Economic Systems, Elsevier, vol. 45(1).
    2. Lukas Pfeifer & Martin Hodula, 2018. "A Profit-to-Provisioning Approach to Setting the Countercyclical Capital Buffer: The Czech Example," Working Papers 2018/5, Czech National Bank.
    3. repec:cnb:ocpubc:tafs2020/6 is not listed on IDEAS
    4. Malovaná, Simona & Kolcunová, Dominika & Brož, Václav, 2019. "Does monetary policy influence banks’ risk weights under the internal ratings-based approach?," Economic Systems, Elsevier, vol. 43(2), pages 1-1.
    5. repec:cnb:ocpubc:fsr1718/2 is not listed on IDEAS
    6. Amila Žunić & Kemal Kozarić & Emina Žunić Dželihodžić, 2021. "Non-Performing Loan Determinants and Impact of COVID-19: Case of Bosnia and Herzegovina," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(3), pages 5-22.
    7. Lukas Pfeifer & Martin Hodula & Libor Holub & Zdenek Pikhart, 2018. "The Leverage Ratio and Its Impact on Capital Regulation," Working Papers 2018/15, Czech National Bank.

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    More about this item

    Keywords

    financial cycle; financial stability; internal ratings-based approach; risk weight.;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law

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