IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

The Procyclical Effects Of Basel Ii

  • Rafael Repullo


    (CEMFI, Centro de Estudios Monetarios y Financieros)

  • Javier Suarez


    (CEMFI, Centro de Estudios Monetarios y Financieros)

We analyze the cyclical effects of moving from risk-insensitive (Basel I) to risk-sensitive (Basel II) capital requirements in the context of a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period. Banks anticipate that shocks to their earnings as well as the cyclical position of the economy can impair their capacity to lend in the future and, as a precaution, hold capital buffers. We find that the new regulation changes the behavior of these buffers from countercyclical to procyclical. Yet, the higher buffers maintained in expansions are insufficient to prevent a significant contraction in the supply of credit at the arrival of a recession. We show that cyclical adjustments in the confidence level behind Basel II can reduce its procyclical effects without compromising banks’ long-run solvency.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by CEMFI in its series Working Papers with number wp2008_0809.

in new window

Date of creation: Jun 2008
Date of revision:
Handle: RePEc:cmf:wpaper:wp2008_0809
Contact details of provider: Postal: Casado del Alisal, 5, 28014 Madrid
Phone: 914290551
Fax: 914291056
Web page:

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.:

as in new window
  1. Christopher A. Hennessy & Toni M. Whited, 2007. "How Costly Is External Financing? Evidence from a Structural Estimation," Journal of Finance, American Finance Association, vol. 62(4), pages 1705-1745, 08.
  2. Steven A. Sharpe, 1989. "Asymmetric information, bank lending, and implicit contracts: a stylized model of customer relationships," Finance and Economics Discussion Series 70, Board of Governors of the Federal Reserve System (U.S.).
  3. Cristina Lopez-Mayan, 2014. "Microeconometric Analysis of Residential Water Demand," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 59(1), pages 137-166, September.
  4. Thomas F. Cooley & Vincenzo Quadrini, 1999. "Financial Markets and Firm Dynamics," Working Papers 99-14, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Douglas W. Diamond & Raghuram G. Rajan, 1999. "A Theory of Bank Capital," NBER Working Papers 7431, National Bureau of Economic Research, Inc.
  6. Mencía, Javier & Sentana, Enrique, 2009. "Multivariate location-scale mixtures of normals and mean-variance-skewness portfolio allocation," Journal of Econometrics, Elsevier, vol. 153(2), pages 105-121, December.
  7. Antonio Cabrales & Roberto Serrano, 2007. "Implementation in Adaptive Better-Response Dynamics," Economics Working Papers we075731, Universidad Carlos III, Departamento de Economía.
  8. Abel Elizalde & Rafael Repullo, 2007. "Economic and Regulatory Capital in Banking: What Is the Difference?," International Journal of Central Banking, International Journal of Central Banking, vol. 3(3), pages 87-117, September.
  9. Roberto Serrano & Allan M. Feldman, 2007. "Arrow’S Impossibility Theorem: Preference Diversity In A Single-Profile World," Working Papers wp2007_0710, CEMFI.
  10. Enrique Moral-Benito, 2010. "Determinants of economic growth: A Bayesian panel data approach," Banco de Espa�a Working Papers 1031, Banco de Espa�a.
  11. Max Bruche & Carlos Gonzalez-Aguado, 2006. "Recovery rates, default probabilities and the credit cycle," LSE Research Online Documents on Economics 24524, London School of Economics and Political Science, LSE Library.
  12. Laura Hospido, 2007. "Modelling Heterogeneity And Dynamics In The Volatility Of Individual Wages," Working Papers wp2007_0717, CEMFI.
  13. 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.
  14. 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.
  15. Samu Peura & Jussi Keppo, 2006. "Optimal Bank Capital with Costly Recapitalization," The Journal of Business, University of Chicago Press, vol. 79(4), pages 2163-2202, July.
  16. Enrique Sentana, 2009. "The econometrics of mean-variance efficiency tests: a survey," Econometrics Journal, Royal Economic Society, vol. 12(3), pages C65-C101, November.
  17. Bentolila, Samuel & Dolado, Juan J. & Jimeno, Juan F., 2007. "Does Immigration Affect the Phillips Curve? Some Evidence for Spain," IZA Discussion Papers 3249, Institute for the Study of Labor (IZA).
  18. 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.).
  19. Javier Mencía & Enrique Sentana, 2012. "Distributional Tests in Multivariate Dynamic Models with Normal and Student-t Innovations," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 133-152, February.
  20. Victor Aguirregabiria & Pedro mira, 2007. "Dynamic Discrete Choice Structural Models: A Survey," Working Papers tecipa-297, University of Toronto, Department of Economics.
  21. Jesús Saurina & Carlos Trucharte, 2007. "An assessment of Basel II procyclicality in mortgage portfolios," Banco de Espa�a Working Papers 0712, Banco de Espa�a.
  22. Gerard Llobet & Michael Manove, 2006. "Network Size and Network Capture," Boston University - Department of Economics - Working Papers Series WP2006-007, Boston University - Department of Economics.
  23. Rene Saran & Roberto Serrano, 2007. "The Evolution of Bidding Behavior in Private-Values Auction and Double Auctions," Working Papers 2007-01, Brown University, Department of Economics.
  24. Blum, Jurg & Hellwig, Martin, 1995. "The macroeconomic implications of capital adequacy requirements for banks," European Economic Review, Elsevier, vol. 39(3-4), pages 739-749, April.
  25. Gema Zamarro, 2006. "Accounting For Heterogeneous Returns In Sequential Schooling Decisions," Working Papers wp2006_0609, CEMFI.
  26. Dimitrios Tsomocos & Eva Catarineu-Rabell & Patricia Jackson, 2003. "Procyclicality and the new Basel Accord–banks’ choice of loan rating system," FMG Discussion Papers dp464, Financial Markets Group.
  27. Jose Ceron & Javier Suarez, 2006. "Hot And Cold Housing Markets: International Evidence," Working Papers wp2006_0603, CEMFI.
  28. Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
  29. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  30. David Martinez-Miera & Rafael Repullo, 2010. "Does Competition Reduce the Risk of Bank Failure?," Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3638-3664, October.
  31. Gordy, Michael B. & Howells, Bradley, 2006. "Procyclicality in Basel II: Can we treat the disease without killing the patient?," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 395-417, July.
  32. Jesús Saurina & Carlos Trucharte, 2007. "An Assessment of Basel II Procyclicality in Mortgage Portfolios," Journal of Financial Services Research, Springer, vol. 32(1), pages 81-101, October.
  33. Lindquist, Kjersti-Gro, 2004. "Banks' buffer capital: how important is risk," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 493-513, April.
  34. Ernst-Ludwig VON THADDEN, 1998. "Asymmetric Information, Bank Lending and Implicit Contracts : The Winner's Curse," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9809, Université de Lausanne, Faculté des HEC, DEEP.
  35. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
  36. Robert J. Aumann & Roberto Serrano, 2007. "An Economic Index of Riskiness," Discussion Paper Series dp446, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem.
  37. Estrella, Arturo, 2004. "The cyclical behavior of optimal bank capital," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1469-1498, June.
  38. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  39. Enrique Sentana & Gabriele Fiorentini, 2007. "On The Efficiency And Consistency Of Likelihood Estimation In Multivariate Conditionally Heteroskedastic Dynamic Regression Models," Working Papers wp2007_0713, CEMFI.
  40. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, March.
  41. Roberto Serrano, 2007. "Cooperative Games: Core and Shapley Value," Working Papers 2007-11, Brown University, Department of Economics.
  42. John R. Graham, 2000. "How Big Are the Tax Benefits of Debt?," Journal of Finance, American Finance Association, vol. 55(5), pages 1901-1941, October.
  43. Stefano Gagliarducci & Tommaso Nannicini & Paolo Naticchioni, 2011. "Electoral Rules and Politicians' Behavior: A Micro Test," American Economic Journal: Economic Policy, American Economic Association, vol. 3(3), pages 144-74, August.
  44. Enrica Detragiache & Paolo Garella & Luigi Guiso, 2000. "Multiple versus Single Banking Relationships: Theory and Evidence," Journal of Finance, American Finance Association, vol. 55(3), pages 1133-1161, 06.
  45. Enrique Sentana & Dante Amegual, 2008. "A Comparison Of Mean-Variance Efficiency Tests," Working Papers wp2008_0806, CEMFI.
  46. Gerard Llobet & Anna Layne-Farrar & A. Jorge Padilla, 2008. "Are Joint Negotiations In Standard Stting "Reasonably Necessary"?," Working Papers wp2008_0808, CEMFI.
  47. Laura Crespo, 2006. "Caring For Parents And Employment Status Of European Mid-Life Women," Working Papers wp2006_0615, CEMFI.
  48. Repullo, Rafael & Suarez, Javier, 2004. "Loan pricing under Basel capital requirements," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 496-521, October.
  49. 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.
  50. Koopman, Siem Jan & Lucas, Andre & Klaassen, Pieter, 2005. "Empirical credit cycles and capital buffer formation," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 3159-3179, December.
  51. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  52. Max Bruche, 2006. "Estimating Structural Models Of Corporate Bond Prices," Working Papers wp2006_0610, CEMFI.
  53. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
  54. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cmf:wpaper:wp2008_0809. 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: (Araceli Requerey)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.