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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, issue 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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    1. Peek, Joe & Rosengren, Eric S, 1997. "The International Transmission of Financial Shocks: The Case of Japan," American Economic Review, American Economic Association, vol. 87(4), pages 495-505, September.
    2. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    3. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
    4. Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
    5. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, March.
    6. Carling, Kenneth & Jacobson, Tor & Linde, Jesper & Roszbach, Kasper, 2007. "Corporate credit risk modeling and the macroeconomy," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 845-868, March.
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    Keywords

    Bank capital ; Business cycles;

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