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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- repec:hrv:faseco:33077921 is not listed on IDEAS
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Full references (including those not matched with items on IDEAS)
- Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2010. "Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons," NBER Working Papers 16567, National Bureau of Economic Research, Inc.
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