IDEAS home Printed from https://ideas.repec.org/a/kap/jfsres/v32y2007i1p81-101.html
   My bibliography  Save this article

An Assessment of Basel II Procyclicality in Mortgage Portfolios

Author

Listed:
  • Jesús Saurina

    ()

  • Carlos Trucharte

    ()

Abstract

In this paper we develop a probability of default (PD) model for mortgage loans, taking advantage of the Spanish Credit Register, a comprehensive database on loan characteristics and credit quality. From that model, we calculate different types of PDs: point in time, PIT, through the cycle, TTC, average across the cycle and acyclical. Then, we compare capital requirements coming from the different Basel II approaches. We show that minimum regulatory capital under Basel II can be very sensitive to the risk measurement methodology employed. Thus, the procyclicality of regulatory capital requirements under Basel II is an open question, depending on the way internal rating systems are implemented and their output is utilised. We focus on the mortgage portfolio since it is one of the most under researched areas regarding the impact of Basel II and because it is one of the most important banks’ portfolios.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Jesús Saurina & Carlos Trucharte, 2007. "An Assessment of Basel II Procyclicality in Mortgage Portfolios," Journal of Financial Services Research, Springer;Western Finance Association, vol. 32(1), pages 81-101, October.
  • Handle: RePEc:kap:jfsres:v:32:y:2007:i:1:p:81-101
    DOI: 10.1007/s10693-007-0008-1
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s10693-007-0008-1
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Gambacorta, L. & Martínez-Pagés, J. & Sevestre, P. & Worms, A., 2002. "Financial Systems and the Role of Banks in Monetary Policy Transmission in the Euro Area.Author-Name: Ehrmann, M," Working papers 93, Banque de France.
    2. 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.
    3. Ehrmann, Michael & Gambacorta, Leonardo & Martinéz Pagés, Jorge & Sevestre, Patrick & Worms, Andreas, 2001. "Financial systems and the role of banks in monetary policy transmission in the euro area," Working Paper Series 0105, European Central Bank.
    4. Eva Catarineu-Rabell & Patricia Jackson & Dimitrios Tsomocos, 2005. "Procyclicality and the new Basel Accord - banks’ choice of loan rating system," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(3), pages 537-557, October.
    5. Gambacorta, Leonardo & Mistrulli, Paolo Emilio, 2004. "Does bank capital affect lending behavior?," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 436-457, October.
    6. C. A.E. Goodhart, 2005. "Financial Regulation, Credit Risk and Financial Stability," National Institute Economic Review, National Institute of Economic and Social Research, vol. 192(1), pages 118-127, April.
    7. Tor Jacobson & Jesper Lindé & Kasper Roszbach, 2005. "Credit Risk Versus Capital Requirements under Basel II: Are SME Loans and Retail Credit Really Different?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 28(1), pages 43-75, October.
    8. Linda Allen & Anthony Saunders, 2004. "Incorporating Systemic Influences Into Risk Measurements: A Survey of the Literature," Journal of Financial Services Research, Springer;Western Finance Association, vol. 26(2), pages 161-191, October.
    9. Peek, Joe & Rosengren, Eric, 1995. "The Capital Crunch: Neither a Borrower nor a Lender Be," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 625-638, August.
    10. Javier Delgado & Vicente Salas-Fumás & Jesús Saurina, 2006. "The joint size and ownership specialization in banks' lending," Working Papers 0606, Banco de España;Working Papers Homepage.
    11. Gordy, Michael B. & Howells, Bradley, 2006. "Procyclicality in Basel II: Can we treat the disease without killing the patient?," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 395-417, July.
    12. Jimenez, Gabriel & Saurina, Jesus, 2004. "Collateral, type of lender and relationship banking as determinants of credit risk," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2191-2212, September.
    13. Dietsch, Michel & Petey, Joel, 2002. "The credit risk in SME loans portfolios: Modeling issues, pricing, and capital requirements," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 303-322, March.
    14. William R. White, 2006. "Procyclicality in the financial system: do we need a new macrofinancial stabilisation framework?," BIS Working Papers 193, Bank for International Settlements.
    15. Edward I. Altman & Brooks Brady & Andrea Resti & Andrea Sironi, 2005. "The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2203-2228, November.
    16. Calem, Paul S. & LaCour-Little, Michael, 2004. "Risk-based capital requirements for mortgage loans," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 647-672, March.
    17. 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.
    18. Jimenez, Gabriel & Salas, Vicente & Saurina, Jesus, 2006. "Determinants of collateral," Journal of Financial Economics, Elsevier, vol. 81(2), pages 255-281, August.
    19. Amato, Jeffery D. & Furfine, Craig H., 2004. "Are credit ratings procyclical?," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2641-2677, November.
    20. Mojon, Benoît & Kashyap, Anil K. & Angeloni, Ignazio & Terlizzese, Daniele, 2002. "Monetary Transmission in the Euro Area : Where Do We Stand?," Working Paper Series 0114, European Central Bank.
    21. Pennacchi, George G., 2005. "Risk-based capital standards, deposit insurance, and procyclicality," Journal of Financial Intermediation, Elsevier, vol. 14(4), pages 432-465, October.
    22. 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.
    23. Berger, Allen N & Udell, Gregory F, 1994. "Do Risk-Based Capital Allocate Bank Credit and Cause a "Credit Crunch"' in the United States?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 585-628, August.
    24. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Repullo, Rafael & Suarez, Javier, 2008. "The Procyclical Effects of Basel II," CEPR Discussion Papers 6862, C.E.P.R. Discussion Papers.
    2. Silvia Sgherri & Bertrand Gruss, 2009. "The Volatility Costs of Procyclical Lending Standards; An Assessment Using a Dsge Model," IMF Working Papers 09/35, International Monetary Fund.
    3. Evžen Kocenda & Martin Vojtek, 2011. "Default Predictors in Retail Credit Scoring: Evidence from Czech Banking Data," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(6), pages 80-98, November.
    4. Rafael Repullo & Javier Suarez, 2013. "The Procyclical Effects of Bank Capital Regulation," Review of Financial Studies, Society for Financial Studies, vol. 26(2), pages 452-490.
    5. Correa, Arnildo & Marins, Jaqueline & Neves, Myrian & da Silva, Antonio Carlos, 2014. "Credit Default and Business Cycles: An Empirical Investigation of Brazilian Retail Loans," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 68(3), September.
    6. Markus Behn & Rainer Haselmann & Paul Wachtel, 2016. "Procyclical Capital Regulation and Lending," Journal of Finance, American Finance Association, vol. 71(2), pages 919-956, April.
    7. Valerie Revest & Alessandro Sapio, 2016. "The creation function of a junior listing venue: An empirical test on the Alternative Investment Market," LEM Papers Series 2016/32, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    8. Rainer Baule & Christian Tallau, 2016. "Revisiting Basel risk weights: cross-sectional risk sensitivity and cyclicality," Journal of Business Economics, Springer, vol. 86(8), pages 905-931, November.
    9. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
    10. Rafael Repullo & Jesús Saurina & Carlos Trucharte, 2010. "Mitigating the pro-cyclicality of Basel II," Economic Policy, CEPR;CES;MSH, vol. 25, pages 659-702, October.
    11. repec:eee:finsta:v:33:y:2017:i:c:p:133-149 is not listed on IDEAS
    12. Patrick Van Roy & Stijn Ferrari & Cristina Vespro, 2018. "Sensitivity of credit risk stress test results: Modelling issues with an application to Belgium," Working Paper Research 338, National Bank of Belgium.
    13. Santiago Fernández de Lis & Alicia García-Herrero, 2012. "Dynamic Provisioning: Some Lessons from Experience," Chapters,in: Implications of the Global Financial Crisis for Financial Reform and Regulation in Asia, chapter 4 Edward Elgar Publishing.
    14. Calabrese, Raffaella, 2014. "Downturn Loss Given Default: Mixture distribution estimation," European Journal of Operational Research, Elsevier, vol. 237(1), pages 271-277.
    15. Santiago Fernández de Lis & Alicia Garcia-Herrero, 2010. "Dynamic provisioning: Some lessons from existing experiences," Working Papers 1014, BBVA Bank, Economic Research Department.
    16. Alexandra Schindele & Andrea Szczesny, 2016. "The impact of Basel II on the debt costs of German SMEs," Journal of Business Economics, Springer, vol. 86(3), pages 197-227, April.
    17. Bellotti, Tony & Crook, Jonathan, 2012. "Loss given default models incorporating macroeconomic variables for credit cards," International Journal of Forecasting, Elsevier, vol. 28(1), pages 171-182.
    18. repec:fgv:epgrbe:v:68:n:3:a:3 is not listed on IDEAS

    More about this item

    Keywords

    Procyclicality; Basel II; rating systems; mortgages; E32; G18; G21;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jfsres:v:32:y:2007:i:1:p:81-101. 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: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: http://www.springer.com .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.