Understanding and Addressing The Pro-Cyclicality Impact of Basel II in The SEACEN Countries
One of the central pillars of the new Basel-II regulatory framework is the concept of risk-based capital requirements. In this regard, under the internal-rating-based (IRB) approach, the amount of capital that a bank will have to hold against a given exposure will be a function of the estimated credit risk of that exposure. One important concern is that the new regulatory capital requirement (CAR) will exacerbate business-cycle fluctuations. In this regard, in a downturn, when a bank's capital base is likely to be eroded by loan losses, the existing (non-defaulted) borrowers will be downgraded by the relevant credit-risk models, forcing the bank to hold more capital against its current loan portfolio. As a result, it would be quite costly for banks to raise fresh external capital in down times. Banks would be forced to cut back on lending activity (bank lending channel), thereby contributing to a worsening of the initial downturn. Based on the empirical studies for several SEACEN countries, we find that there is no strong evidence that there is pro-cyclicality impact of Basel II implementation. Nonetheless, SEACEN countries must give serious consideration to their economic situations, especially in case of unfavourable developments, when implementing Basel II for their banking sectors.
|This book is provided by South East Asian Central Banks (SEACEN) Research and Training Centre in its series Research Studies with number rp72 and published in 2008.|
|Contact details of provider:|| Postal: Level 5, Sasana Kijang, Bank Negara Malaysia, 2 Jalan Dato? Onn, 50480 Kuala Lumpur|
Phone: 603-9195 1888
Fax: 603-9195 1801
Web page: http://edirc.repec.org/data/seacemy.html
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Anil K Kashyap & Jeremy C. Stein, 1994.
"The Impact of Monetary Policy on Bank Balance Sheets,"
NBER Working Papers
4821, National Bureau of Economic Research, Inc.
- Kashyap, Anil K. & Stein, Jeremy C., 1995. "The impact of monetary policy on bank balance sheets," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 151-195, June.
- Anil Kashyap & Jeremy C. Stein, 1993.
"Monetary Policy and Bank Lending,"
NBER Working Papers
4317, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:sea:rstudy:rp72. 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: (Yunyee)
If references are entirely missing, you can add them using this form.