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Basel II and the Capital Requirements Directive: Responding to the 2008/09 Financial Crisis

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  • Ojo, Marianne

Abstract

This paper addresses factors which have prompted the need for further revision of banking regulation, with particular reference to the Capital Requirements Directive. The Capital Requirements Directive (CRD), which comprises the 2006/48/EC Directive on the taking up and pursuit of the business of credit institutions and the 2006/49/EC Directive on the capital adequacy of investment firms and credit institutions, implemented the revised framework for the International Convergence of Capital Measurement and Capital Standards (Basel II) within EU member states. Pro cyclicality has attracted a lot of attention – particularly with regards to the recent financial crisis, owing to concerns arising from increased sensitivity to credit risk under Basel II. This paper not only considers whether such concerns are well-founded, but also the beneficial and not so beneficial consequences emanating from Basel II’s increased sensitivity to credit risk (as illustrated by the Internal Ratings Based approaches). In so doing it considers the effects of Pillar 2 of Basel II, namely, supervisory review, with particular reference to buffer levels, and whether banks’ actual capital ratios can be expected to correspond with Basel capital requirements given the fact that they are expected to hold certain capital buffers under Pillar 2. Furthermore, it considers how regulators can respond to prevent systemic risks to the financial system during periods when firms which are highly leveraged become reluctant to lend. In deciding to cut back on lending activities, are the decisions of such firms justified in situations where such firms’ credit risk models are extremely and unduly sensitive - hence the level of capital being retained is actually much higher than minimum regulatory Basel capital requirements ?

Suggested Citation

  • Ojo, Marianne, 2009. "Basel II and the Capital Requirements Directive: Responding to the 2008/09 Financial Crisis," MPRA Paper 17379, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:17379
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    File URL: https://mpra.ub.uni-muenchen.de/70886/1/MPRA_paper_70886.pdf
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    References listed on IDEAS

    as
    1. Ojo, Marianne, 2009. "Central bank’s role and involvement in bank regulation: Lender of last resort arrangements and the Special Resolution Regime (SRR)," MPRA Paper 15771, University Library of Munich, Germany.
    2. Simona E. Cociuba, 2009. "Seeking stability: what's next for banking regulation?," Economic Letter, Federal Reserve Bank of Dallas, vol. 4(apr).
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Costa Cabral, Nazare, 2010. "Breve guia temático e bibliográfico sobre o estudo da actual crise financeira e económica
      [Short thematic guide to the study of current financial and economic crisis]
      ," MPRA Paper 20743, University Library of Munich, Germany.
    2. Ojo, Marianne, 2015. "Enhancing the reliability of performance measures in empirical based research: leverage ratios and theoretical based research," MPRA Paper 61789, University Library of Munich, Germany.
    3. Marianne, Ojo, 2015. "Long term funding and regulation: facilitating financial stability and development in low income developing countries," MPRA Paper 62383, University Library of Munich, Germany.
    4. Ojo, Marianne, 2015. "The unintended consequences and challenges of the Basel III Leverage Ratio: supplementary leverage ratios," MPRA Paper 61330, University Library of Munich, Germany.
    5. Marianne, Ojo, 2015. "Long term funding and regulation: facilitating financial stability and development (low income developing countries)," MPRA Paper 63406, University Library of Munich, Germany.

    More about this item

    Keywords

    Basel II; Capital Requirements Directive; pro cyclicality; risk; regulation; banks;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • D0 - Microeconomics - - General
    • K2 - Law and Economics - - Regulation and Business Law
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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