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Did Basel regulation cause a significant procyclicality?

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  • Ly, Kim Cuong
  • Shimizu, Katsutoshi

Abstract

This paper examines the procyclical effect of risk-sensitive capital regulation on bank lending. We find evidence that the sensitivity of bank lending to GDP is significantly positive under the internal rating-based approach. Our findings show that the risk-sensitive requirements of the Basel II and III regulations have procyclical effects on bank lending in nine European countries. The introduction of the risk-sensitive capital requirement rule negatively impacts lending in these countries. The policy implication is that regulators should place greater priority on building a buffer in advance, which can be used in times of stress rather than for dampening excess cyclicality.

Suggested Citation

  • Ly, Kim Cuong & Shimizu, Katsutoshi, 2021. "Did Basel regulation cause a significant procyclicality?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
  • Handle: RePEc:eee:intfin:v:73:y:2021:i:c:s1042443121000846
    DOI: 10.1016/j.intfin.2021.101365
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    More about this item

    Keywords

    Basel regulation; Business cycle; Procyclicality; Buffer capital;
    All these keywords.

    JEL classification:

    • 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
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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