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Norwegian banks in a recession: Procyclical implications of Basel II

  • Henrik Andersen

    ()

    (Norges Bank (Central Bank of Norway))

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    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.

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    File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2009/WP-20094/
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    Paper provided by Norges Bank in its series Working Paper with number 2009/04.

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    Length: 32 pages
    Date of creation: 13 Mar 2009
    Date of revision:
    Handle: RePEc:bno:worpap:2009_04
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    1. Petr Jakubik & Christian Schmieder, 2008. "Stress Testing Credit Risk: Is the Czech Republic Different from Germany?," Working Papers 2008/9, Czech National Bank, Research Department.
    2. Henrik Andersen & Sigbjørn Atle Berg & Eilev S. Jansen, 2008. "The dynamics of operating income in the Norwegian banking sector," Working Paper 2008/13, Norges Bank.
    3. Ayuso, Juan & Perez, Daniel & Saurina, Jesus, 2004. "Are capital buffers pro-cyclical?: Evidence from Spanish panel data," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 249-264, April.
    4. Henrik Andersen, 2008. "Failure prediction of Norwegian banks: A Logit approach," Working Paper 2008/02, 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. Eva Catarineu-Rabell & Patricia Jackson & Dimitrios P.Tsomocos, 2003. "Procyclicality and the new Basel Accord - Banks' choice of loan rating system," OFRC Working Papers Series 2003fe06, Oxford Financial Research Centre.
    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. 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.
    9. Michael B. Gordy, 2002. "A risk-factor model foundation for ratings-based bank capital rules," Finance and Economics Discussion Series 2002-55, Board of Governors of the Federal Reserve System (U.S.).
    10. Anil Kashyap & Jeremy C. Stein, 2004. "Cyclical implications of the Basel II capital standards," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 18-31.
    11. 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, Research Centre.
    12. Claudio Borio & Craig Furfine & Philip Lowe, 2001. "Procyclicality of the financial system and financial stability: issues and policy options," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 1-57 Bank for International Settlements.
    13. Olga Andreeva, 2004. "Aggregate bankruptcy probabilities and their role in explaining banks’ loan losses," Working Paper 2004/02, Norges Bank.
    14. 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.
    15. Paul S. Calem & Michael LaCour-Little, 2001. "Risk-based capital requirements for mortgage loans," Finance and Economics Discussion Series 2001-60, Board of Governors of the Federal Reserve System (U.S.).
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