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Effectiveness Of The Basel Iii Framework: Procyclicality In The Banking Sector And Macroeconomic Fluctuations

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  • JINYOUNG YU

    (College of Economics, Sungkyunkwan University, 25-2, Sungkyunkwan-ro, Jongno-gu, Seoul 03063, Republic of Korea)

  • DOOJIN RYU

    (College of Economics, Sungkyunkwan University, 25-2, Sungkyunkwan-ro, Jongno-gu, Seoul 03063, Republic of Korea)

Abstract

This study examines the effectiveness of the Basel III capital framework for mitigating procyclical behavior in the banking sector regarding macroeconomic variability and uncertainty. Our sample includes Korean banking industry data from 2001 to 2018. Using fixed- and random-effects panel data and fixed-effects difference-in-differences approaches, we discover that procyclicality in banks’ performance and capital factors is mitigated after the Basel III accord is adopted. The capital adequacy ratio’s volatility increases, whereas the loans-to-assets ratio increases and stabilizes. The Basel III accord therefore effectively serves its intended purpose, as it encourages banks to serve as shock absorbers for the economy and reduces economic uncertainty.

Suggested Citation

  • Jinyoung Yu & Doojin Ryu, 2021. "Effectiveness Of The Basel Iii Framework: Procyclicality In The Banking Sector And Macroeconomic Fluctuations," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 66(03), pages 855-879, June.
    • Handle: RePEc:wsi:serxxx:v:66:y:2021:i:03:n:s0217590820460066
    DOI: 10.1142/S0217590820460066
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    Cited by:

    1. Chung, Hae Jin & Jhang, Hogyu & Ryu, Doojin, 2023. "Impacts of COVID-19 pandemic on corporate cash holdings: Evidence from Korea," Emerging Markets Review, Elsevier, vol. 56(C).
    2. Ryu, Doojin & Webb, Robert I. & Yu, Jinyoung, 2022. "Funding liquidity shocks and market liquidity providers," Finance Research Letters, Elsevier, vol. 47(PB).
    3. Daehyeon PARK & Doojin RYU, 2021. "Forecasting Stock Market Dynamics using Bidirectional Long Short-Term Memory," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 22-34, June.

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