IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Procyclical implications of Basel II: Can the cyclicality of capital requirements be contained?

  • Andersen, Henrik
Registered author(s):

    While the current capital adequacy framework, Basel II, aims to make banks' capital requirements more sensitive to the underlying risk of the assets, it may also introduce an additional source of procyclicality in the banking sector. In this paper we assess the potential cyclicality of Basel II for the entire bank portfolio. This is in contrast to previous studies which have taken into account only parts of banks' assets, and also neglected the potential cyclicality of bank capital. We apply a detailed data set covering a relatively long period to analyse the cyclicality of both bank capital and Basel II capital requirements. Moreover, we employ a more comprehensive system of models than applied in the existing literature. Consistent with previous evidence, we find a substantial increase in the calculated Basel II capital requirements at the same time as bank capital deteriorates in a recession scenario. However, we also find that the cyclicality of Basel II capital requirements may be effectively contained if risk weightings are based on a sufficiently long observation period which includes economic downturns.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/pii/S1572308910000331
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Journal of Financial Stability.

    Volume (Year): 7 (2011)
    Issue (Month): 3 (August)
    Pages: 138-154

    as
    in new window

    Handle: RePEc:eee:finsta:v:7:y:2011:i:3:p:138-154
    Contact details of provider: Web page: http://www.elsevier.com/locate/jfstabil

    References listed on IDEAS
    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.:

    as in new window
    1. Terhi Jokipii & Alistair Milne, 2009. "Bank Capital Buffer and Risk Adjustment Decisions," Working Papers 2009-09, Swiss National Bank.
    2. Claudio Borio & Craig Furfine & Philip Lowe, 2001. "Procyclicality of the financial system and financial stability: issues and policy options," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 1-57 Bank for International Settlements.
    3. Jacob A. Bikker & Paul A. J. Metzemakers, 2007. "Is Bank Capital Procyclical? A Cross-Country Analysis," Credit and Capital Markets, Credit and Capital Markets, vol. 40(2), pages 225-264.
    4. Henrik Andersen, 2008. "Failure prediction of Norwegian banks: A Logit approach," Working Paper 2008/02, Norges Bank.
    5. Eva Catarineu-Rabell & Patricia Jackson & Dimitrios P Tsomocos, 2003. "Procyclicality and the new Basel Accord - banks' choice of loan rating system," Bank of England working papers 181, Bank of England.
    6. Jokivuolle, Esa & Virolainen, Kimmo & Vähämaa, Oskari, 2008. "Macro-model-based stress testing of Basel II capital requirements," Research Discussion Papers 17/2008, Bank of Finland.
    7. Anil Kashyap & Jeremy C. Stein, 2004. "Cyclical implications of the Basel II capital standards," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 18-31.
    8. Frank Dierick & Fatima Pires & Martin Scheicher & Kai Gereon Spitzer, 2005. "The New Basel Capital Framework and its implementation in the European Union," Occasional Paper Series 42, European Central Bank.
    9. Ayuso, Juan & Perez, Daniel & Saurina, Jesus, 2004. "Are capital buffers pro-cyclical?: Evidence from Spanish panel data," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 249-264, April.
    10. Charles Goodhart & Boris Hofmann & Miguel Segoviano, 2004. "Bank Regulation and Macroeconomic Fluctuations," Oxford Review of Economic Policy, Oxford University Press, vol. 20(4), pages 591-615, Winter.
    11. Henrik Andersen & Sigbjørn Atle Berg & Eilev S. Jansen, 2008. "The dynamics of operating income in the Norwegian banking sector," Working Paper 2008/13, Norges Bank.
    12. Bardsen, Gunnar & Eitrheim, Oyvind & Jansen, Eilev S. & Nymoen, Ragnar, 2005. "The Econometrics of Macroeconomic Modelling," OUP Catalogue, Oxford University Press, number 9780199246502, March.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:finsta:v:7:y:2011:i:3:p:138-154. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.