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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- Giannone, Domenico & Lenza, Michele & Reichlin, Lucrezia, 2009.
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- Domenico Giannone & Michele Lenza & Lucrezia Reichlin, 2008. "Business Cycles in the Euro Area," NBER Working Papers 14529, National Bureau of Economic Research, Inc.
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16567, National Bureau of Economic Research, Inc.
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"Empirical analysis of corporate credit lines,"
Working Paper Series
2007-14, Federal Reserve Bank of San Francisco.
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