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Quantifying the Cyclicality of Regulatory Capital – First Evidence from Austria

Listed author(s):
  • Stefan Kerbl

    ()

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

  • Michael Sigmund

    ()

    (Oesterreichische Nationalbank, Financial Markets Analysis and Surveillance Division)

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.

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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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Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Financial Stability Report.

Volume (Year): (2009)
Issue (Month): 18 ()
Pages: 93-103

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Handle: RePEc:onb:oenbfs:y:2009:i:18:b:4
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  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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