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Norwegian banks in a recession: Procyclical implications of Basel II

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  • Henrik Andersen

    () (Norges Bank (Central Bank of Norway))

Abstract

While the new capital adequacy framework, Basel II, aims to make the banks’ capital requirements more sensitive to the underlying risk of the assets, it may also introduce an additional source of procyclicality in the banking sector. A growing share of the literature has assessed the potential cyclicality of Basel II. However, only parts of the banks’ assets have been considered. In addition, the cyclicality of the capital positions is usually left out of the calculations. This paper applies the stress testing framework of Norges Bank to analyse the cyclicality of capital positions and the cyclicality of Basel II capital requirements for the entire bank portfolio of Norwegian banks. We find a substantial increase in the calculated Basel II capital requirements in a recession scenario for the Norwegian economy. We also find a negative co-movement between capital positions and Basel II capital requirements. Hence, our analysis demonstrates that Basel II may introduce an additional source of procyclicality.

Suggested Citation

  • Henrik Andersen, 2009. "Norwegian banks in a recession: Procyclical implications of Basel II," Working Paper 2009/04, Norges Bank.
  • Handle: RePEc:bno:worpap:2009_04
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    File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2009/WP-20094/
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    References listed on IDEAS

    as
    1. Frank Dierick & Fatima Pires & Martin Scheicher & Kai Gereon Spitzer, 2005. "The New Basel Capital Framework and its implementation in the European Union," Occasional Paper Series 42, European Central Bank.
    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. Stolz, Stéphanie & Wedow, Michael, 2005. "Banks' regulatory capital buffer and the business cycle: evidence for German savings and cooperative banks," Discussion Paper Series 2: Banking and Financial Studies 2005,07, Deutsche Bundesbank.
    4. Olga Andreeva, 2004. "Aggregate bankruptcy probabilities and their role in explaining banks’ loan losses," Working Paper 2004/02, Norges Bank.
    5. Carling, Kenneth & Jacobson, Tor & Lindé, Jesper & Roszbach, Kasper, 2002. "Capital Charges under Basel II: Corporate Credit Risk Modelling and the Macro Economy," Working Paper Series 142, Sveriges Riksbank (Central Bank of Sweden).
    6. Jacob A. Bikker & Paul A. J. Metzemakers, 2007. "Is Bank Capital Procyclical? A Cross-Country Analysis," Credit and Capital Markets, Credit and Capital Markets, vol. 40(2), pages 225-264.
    7. Edward I. Altman & Brooks Brady & Andrea Resti & Andrea Sironi, 2005. "The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2203-2228, November.
    8. Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
    9. 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.
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    More about this item

    Keywords

    Basel II; procyclicality; capital positions;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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