Bank Capital Requirements, Business Cycle Fluctuations and the Basel Accords: A Synthesis

Ines Drumond ()

FEP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: In order to survey the mechanisms through which the introduction of Basel II bank capital requirements is likely to accentuate the procyclical tendencies of banking, this paper brings together the theoretical literature on the bank capital channel of propagation of exogenous shocks and the literature on the regulatory framework of capital requirements under the Basel Accords. We conclude that, although the theoretical models that revisit the bank capital channel under the new Accord generally support the Basel II procyclicality hypothesis, this issue is still subject to some debate. In particular, the magnitude of the procyclical effects under Basel II should essentially depend on (i) the composition of banks' asset portfolios, (ii) the approach adopted by banks to compute their minimum capital requirements, (iii) the nature of the rating system used by banks, (iv) the view adopted concerning how credit risk evolves through time, (v) the capital buffers over the regulatory minimum held by the banking institutions, (vi) the improvements in credit risk management, and (vii) the supervisor and market intervention under Basel II.

Keywords: Bank Capital Channel; Basel Accords; Business Cycles; Procyclicality (search for similar items in EconPapers)
JEL-codes: E44 G28 (search for similar items in EconPapers)
Pages: 33 pages.
Date: 2008-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac, nep-reg and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: BANK CAPITAL REQUIREMENTS, BUSINESS CYCLE FLUCTUATIONS AND THE BASEL ACCORDS: A SYNTHESIS (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:por:fepwps:277

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