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Quantifying the Cyclicality of Regulatory Capital – First Evidence from Austria

Author

Listed:
  • Stefan Kerbl

    () (Oesterreichische Nationalbank, On-Site Banking Inspections Division – Large Banks)

  • Michael Sigmund

    () (Oesterreichische Nationalbank, Financial Markets Analysis and Surveillance Division)

Abstract

With the financial crisis spreading to the real economy, the discussion about potential procyclical implications of Basel II received a surge of attention. While existing research approaches the topic either from a theoretical perspective or from an empirical perspective that draws on simulated data, we are first in studying the cyclicality of risk weights on the basis of realized data. Furthermore, we are able to differentiate not only between Basel I and Basel II, but also between the Standardized Approach (StA) and the internal ratings-based (IRB) approach. We argue that without knowledge of these approaches’ presumably distinct cyclicality of risk weights, any measure to dampen procyclicality is premature. For this purpose, we first study which banks opt for implementation of the IRB approach and then set up a panel model to quantify the cyclicality of capital requirements. While we find no evidence of cyclicality in portfolios subject to the Basel II StA, we find economically substantial and statistically significant effects in IRB portfolios.

Suggested Citation

  • Stefan Kerbl & Michael Sigmund, 2009. "Quantifying the Cyclicality of Regulatory Capital – First Evidence from Austria," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 18, pages 93-103.
  • Handle: RePEc:onb:oenbfs:y:2009:i:18:b:4
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    File URL: https://www.oenb.at/dam/jcr:8f4e0b39-b12f-489c-83f8-53e6c10f28b8/fsr_18_special_topics04_tcm16-144845.pdf
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    References listed on IDEAS

    as
    1. Hakenes, Hendrik & Schnabel, Isabel, 2011. "Bank size and risk-taking under Basel II," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1436-1449, June.
    2. 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.
    3. Roger Aliaga-Diaz, 2005. "General Equilibrium Implications of the Capital Adequacy Regulation for Banks," Computing in Economics and Finance 2005 238, Society for Computational Economics.
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    Cited by:

    1. A. R. Fonseca & F. González & L. Pereira da Silva, 2010. "Cyclical Effects of Bank Capital Buffers with Imperfect Credit Markets: international evidence," Working Papers Series 216, Central Bank of Brazil, Research Department.
    2. Emanuel Kopp & Christian Ragacs & Stefan W. Schmitz, 2010. "The Economic Impact of Measures Aimed at Strengthening Bank Resilience – Estimates for Austria," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 20, pages 86-114.

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