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Cyclical implications of the Basel II capital standards

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  • Anil K. Kashyap
  • Jeremy C. Stein

Abstract

This article reviews the economic efficiency implications of the Basel II capital standards. The authors argue that the mapping from measures of loan risk to capital requirements should not be time-invariant, but rather should be allowed to vary with business cycle conditions. They also attempt to assess empirically how much cyclicality in capital requirements might be induced by the current Basel II proposal. They find that the degree of cyclicality can be substantial.

Suggested Citation

  • Anil K. Kashyap & Jeremy C. Stein, 2004. "Cyclical implications of the Basel II capital standards," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 28(Q I), pages 18-31.
  • Handle: RePEc:fip:fedhep:y:2004:i:qi:p:18-31:n:v.28no.1
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    References listed on IDEAS

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    Keywords

    Bank capital; Business cycles;

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