Norwegian banks in a recession: Procyclical implications of Basel II

Henrik Andersen
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Henrik Andersen: Norges Bank (Central Bank of Norway)

No 2009/04, Working Paper from Norges Bank

Abstract: While the new capital adequacy framework, Basel II, aims to make the banks’ capital requirements more sensitive to the underlying risk of the assets, it may also introduce an additional source of procyclicality in the banking sector. A growing share of the literature has assessed the potential cyclicality of Basel II. However, only parts of the banks’ assets have been considered. In addition, the cyclicality of the capital positions is usually left out of the calculations. This paper applies the stress testing framework of Norges Bank to analyse the cyclicality of capital positions and the cyclicality of Basel II capital requirements for the entire bank portfolio of Norwegian banks. We find a substantial increase in the calculated Basel II capital requirements in a recession scenario for the Norwegian economy. We also find a negative co-movement between capital positions and Basel II capital requirements. Hence, our analysis demonstrates that Basel II may introduce an additional source of procyclicality.

Keywords: Basel II; procyclicality; capital positions (search for similar items in EconPapers)
JEL-codes: E32 G21 G28 G33 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2009-03-13
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac, nep-reg and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2009_04

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