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A forward-looking model for time-varying capital requirements and the New Basel Capital Accord

  • Costanza Torricelli

    ()

  • Chiara Pederzoli

    ()

This paper proposes a forward-looking model for time-varying capital requirements which finds application within the New Basel Capital Accord (NBCA) framework. The model aims at reconciling two somewhat contrasting objectives of the NBCA proposal: introducing risk-sensitive capital requirements and avoiding at the same time procyclical effects. The model rests on the relationship existing between default rates and the business cycle phases and proposes a modelisation of the default probabilities which is based on a business cycle forecast over the credit horizon. The model is applied to US data over the forecasting period 1971-2002: despite a failure in predicting the early nineties recession, the objective of raising the capital requirements in anticipation of a recessions is in general satisfied. The results obtained are interesting as they suggest that there is room for dampening procyclicality of capital requirements even within a risk-sensitive framework.

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File URL: http://www.dep.unimore.it/materiali_discussione/0453.pdf
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Paper provided by University of Modena and Reggio E., Faculty of Economics "Marco Biagi" in its series Department of Economics with number 0453.

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Length: pages 29
Date of creation: Feb 2004
Date of revision:
Publication status: Published in Journal of Banking and Finance, Vl. 29, 12, 2005
Handle: RePEc:mod:depeco:0453
Contact details of provider: Web page: http://www.economia.unimore.it/

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