Did Basel regulation cause a significant procyclicality?

Kim Cuong Ly and Katsutoshi Shimizu

Journal of International Financial Markets, Institutions and Money, 2021, vol. 73, issue C

Abstract: This paper examines the procyclical effect of risk-sensitive capital regulation on bank lending. We find evidence that the sensitivity of bank lending to GDP is significantly positive under the internal rating-based approach. Our findings show that the risk-sensitive requirements of the Basel II and III regulations have procyclical effects on bank lending in nine European countries. The introduction of the risk-sensitive capital requirement rule negatively impacts lending in these countries. The policy implication is that regulators should place greater priority on building a buffer in advance, which can be used in times of stress rather than for dampening excess cyclicality.

Keywords: Basel regulation; Business cycle; Procyclicality; Buffer capital (search for similar items in EconPapers)
JEL-codes: G14 G18 G21 G28 G32 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:73:y:2021:i:c:s1042443121000846

DOI: 10.1016/j.intfin.2021.101365

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