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An Assessment of Basel II Procyclicality in Mortgage Portfolios

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  • 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.
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  • 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
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    Cited by:

    1. Rafael Repullo & Jesús Saurina & Carlos Trucharte, 2010. "Mitigating the pro-cyclicality of Basel II [Bank loan loss provisions: a re-examination of capital management, earnings management and signalling effects]," Economic Policy, CEPR;CES;MSH, vol. 25(64), pages 659-702.
    2. Rafael Repullo & Javier Suarez, 2008. "The Procyclical Effects of Basel II," Working Papers wp2008_0809, CEMFI.
    3. Corrado, Luisa & Schuler, Tobias, 2017. "Interbank market failure and macro-prudential policies," Journal of Financial Stability, Elsevier, vol. 33(C), pages 133-149.
    4. Ms. Silvia Sgherri & Bertrand Gruss, 2009. "The Volatility Costs of Procyclical Lending Standards: An Assessment Using a Dsge Model," IMF Working Papers 2009/035, International Monetary Fund.
    5. Malovaná, Simona & Kolcunová, Dominika & Brož, Václav, 2019. "Does monetary policy influence banks’ risk weights under the internal ratings-based approach?," Economic Systems, Elsevier, vol. 43(2), pages 1-1.
    6. David Martinez-Miera & Rafael Repullo, 2019. "Monetary Policy, Macroprudential Policy, and Financial Stability," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 809-832, August.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    11. Santiago Fernández de Lis & Alicia García-Herrero, 2012. "Dynamic Provisioning: Some Lessons from Experience," Chapters, in: Masahiro Kawai & David G. Mayes & Peter Morgan (ed.), Implications of the Global Financial Crisis for Financial Reform and Regulation in Asia, chapter 4, Edward Elgar Publishing.
    12. 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, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 68(3), September.
    13. Calabrese, Raffaella, 2014. "Downturn Loss Given Default: Mixture distribution estimation," European Journal of Operational Research, Elsevier, vol. 237(1), pages 271-277.
    14. Santiago Fernández de Lis & Alicia Garcia-Herrero, 2010. "Dynamic provisioning: Some lessons from existing experiences," Working Papers 1014, BBVA Bank, Economic Research Department.
    15. 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.
    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. 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.
    18. 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.
    19. 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.
    20. repec:fgv:epgrbe:v:68:n:3:a:3 is not listed on IDEAS

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    More about this item

    Keywords

    Procyclicality; Basel II; rating systems; mortgages; E32; G18; G21;
    All these keywords.

    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

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