Basel and procyclicality: a comparison of the standardised and IRB approaches to an improved credit risk method
The regulation of bank capital in the form of capital adequacy requirements is itself inherently procyclical; it bites in downturns, but fails to restrain in booms. The more risk-sensitive the regulation, the greater the scope for pro-cyclicality to become a problem, particularly in view of the changing nature of macroeconomic cycles. The simulation exercises performed in this paper suggest that the new Basel II accord, which deliberately aimed at significantly increasing the risk sensitiveness of capital requirements, may in fact considerably accentuate the procyclicality of the regulatory system. Since the experience in the past, also discussed in this paper, suggests that a required hoisting of capital ratios in downturns may be brought about by cutting back lending rather than raising capital, the new capital accord may therefore lead to an amplification of business cycle fluctuations, especially in downturns.
|Date of creation:||Nov 2004|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +44 (020) 7405 7686
Web page: http://www.lse.ac.uk/
More information through EDIRC
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.:
- Merton, Robert C., 1973.
"On the pricing of corporate debt: the risk structure of interest rates,"
684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
- Michael J. Brennan, 2004. "How Did It Happen?," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 33(1), pages 3-22, 02.
- Michael Leahy & Sebastian Schich & Gert Wehinger & Florian Pelgrin & Thorsteinn Thorgeirsson, 2001. "Contributions of Financial Systems to Growth in OECD Countries," OECD Economics Department Working Papers 280, OECD Publishing.
- Berger, Allen N & Udell, Gregory F, 1994.
"Do Risk-Based Capital Allocate Bank Credit and Cause a "Credit Crunch"' in the United States?,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 26(3), pages 585-628, August.
- Allen N. Berger & Gregory F. Udell, 1994. "Did risk-based capital allocate bank credit and cause a "credit crunch" in the United States?," Proceedings, Federal Reserve Bank of Cleveland, pages 585-633.
- Burkhard Drees & Ceyla Pazarbasioglu, 1995. "The Nordic Banking Crises; Pitfalls in Financial Liberalization?," IMF Working Papers 95/61, International Monetary Fund.
- Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999.
"The Science of Monetary Policy: A New Keynesian Perspective,"
CEPR Discussion Papers
2139, C.E.P.R. Discussion Papers.
- Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
- Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
- Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
- Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
- Brennan, Michael J, 2004. "How Did It Happen?," University of California at Los Angeles, Anderson Graduate School of Management qt1047x6kv, Anderson Graduate School of Management, UCLA.
- Nobuhiro Kiyotaki & John Moore, 1995.
NBER Working Papers
5083, National Bureau of Economic Research, Inc.
- C. H. Furfine, 1999. "Interbank exposures: quantifying the risk of contagion," BIS Working Papers 70, Bank for International Settlements.
- Sergio L. Schmukler & Graciela Laura Kaminsky, 2003.
"Short-Run Pain, Long-Run Gain; The Effects of Financial Liberalization,"
IMF Working Papers
03/34, International Monetary Fund.
- Kaminsky, Graciela Laura & Schmukler, Sergio L., 2002. "Short-run pain, long-run gain : the effects of financial liberalization," Policy Research Working Paper Series 2912, The World Bank.
- Graciela Kaminsky & Sergio Schmukler, 2003. "Short-Run Pain, Long-Run Gain: The Effects of Financial Liberalization," NBER Working Papers 9787, National Bureau of Economic Research, Inc.
- Levine, Ross, 1996.
"Financial development and economic growth : views and agenda,"
Policy Research Working Paper Series
1678, The World Bank.
- Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
- Michael Bordo & Barry Eichengreen & Daniela Klingebiel & Maria Soledad Martinez-Peria, 2001. "Is the crisis problem growing more severe?," Economic Policy, CEPR;CES;MSH, vol. 16(32), pages 51-82, 04.
- Craig Furfine, 1999. "Interbank exposures: quantifying the risk of contagion," Proceedings 633, Federal Reserve Bank of Chicago.
- Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:24821. 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: (LSERO Manager)
If references are entirely missing, you can add them using this form.