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Cyclical patterns in profits provisioning and lending of banks and procyclicality of the new basel capital requirements

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  • J.A. Bikker
  • Haixia Hu

Abstract

The proposed risk sensitive minimum requirements of the new Basel Capital Accord have raised concerns about possible (acceleration of) procyclical behaviour of banking, which might threat en macroeconomic stability. This article analyses the interaction between business cycles and banks over the past two decades for 26 industrial countries. As expected, profit appear to move up and down with the business cycle, allowing for accumulation of capital in boom periods. Provisioning for credit losses rise when the cycle falls, but less so when net income of banks is relatively high, which reduces procyclicality. Lending fluctuates with the business cycle, too, but appears to be driven by demand rather than by supply factors such as (short age of ) capital, which cont radicts the assumptions underlying capital crunch theory. All in all, over the last decades, distortion caused by procyclical behaviour of banks has been limited, banking crises excepted.

Suggested Citation

  • J.A. Bikker & Haixia Hu, 2001. "Cyclical patterns in profits provisioning and lending of banks and procyclicality of the new basel capital requirements," Research Series Supervision (discontinued) 39, Netherlands Central Bank, Directorate Supervision.
  • Handle: RePEc:dnb:ressup:39
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    References listed on IDEAS

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    More about this item

    Keywords

    profits; credit loss provisioning; lending; business cycle; procyclicality; credit crunch; bank lending channel; balance sheet;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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