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The Countercyclical Capital Buffer Of Basel Iii: A Critical Assessment

We provide a critical assessment of the countercyclical capital buffer in the new regulatory framework known as Basel III, which is based on the deviation of the credit-to-GDP ratio with respect to its trend. We argue that a mechanical application of the buffer would tend to reduce capital requirements when GDP growth is high and increase them when GDP growth is low, so it may end up exacerbating the inherent pro-cyclicality of risk-sensitive bank capital regulation. We also note that Basel III does not address pro-cyclicality in any other way. We propose a fully rule-based smoothing of minimum capital requirements based on GDP growth.

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Paper provided by CEMFI in its series Working Papers with number wp2011_1102.

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Date of creation: Mar 2011
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Handle: RePEc:cmf:wpaper:wp2011_1102
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  1. Gabriel Jiménez & Jose A. Lopez & Jesus Saurina, 2009. "Empirical Analysis of Corporate Credit Lines," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5069-5098, December.
  2. Domenico Giannone & Michèle Lenza & Lucrezia Reichlin, 2008. "Business Cycles in the euro Area," Working Papers ECARES 2008_040, ULB -- Universite Libre de Bruxelles.
  3. Gabriel Jiménez & Jose A. Lopez & Jesús Saurina, 2009. "EAD calibration for corporate credit lines," Working Paper Series 2009-02, Federal Reserve Bank of San Francisco.
  4. Repullo, Rafael & Suarez, Javier, 2008. "The Procyclical Effects of Basel II," CEPR Discussion Papers 6862, C.E.P.R. Discussion Papers.
  5. �scar Jord� & Moritz Schularick & Alan M Taylor, 2011. "Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons," IMF Economic Review, Palgrave Macmillan, vol. 59(2), pages 340-378, June.
  6. José L. Fillat & Judit Montoriol-Garriga, 2010. "Addressing the pro-cyclicality of capital requirements with a dynamic loan loss provision system," Risk and Policy Analysis Unit Working Paper QAU10-4, Federal Reserve Bank of Boston.
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