Cyclical implications of minimum capital requirements

Frank Heid

No 2005,06, Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank

Abstract: Capital requirements play a key role in the supervision and regulation of banks. The Basel Committee on Banking Supervision is now changing the current framework by introducing risk-sensitive capital charges. There have been concerns that this will unduly increase volatility in the banks' capital. Furthermore, when the credit supply is rationed, capital requirements may exacerbate an economic downturn. We examine the problem of cyclicality in a macroeconomic model which explicitly takes regulatory constraints into account. We find that the capital buffer which banks hold on top of the required minimum plays a crucial role in mitigating the volatility in capital requirements. Therefore, despite the fact that capital charges may vary significantly over time, the effects on the macroeconomy will be moderate.

Keywords: minimum capital requirements; regulatory capital; economic capital; capital buffer; pro-cyclicality; business cycle; bank lending channel (search for similar items in EconPapers)
JEL-codes: E32 E44 G21 (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-ban, nep-fin, nep-fmk, nep-mac and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp2:4261

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