Pro-cyclicality of the Basel Capital Requirement Ratio and Its Impact on Banks-super-∗

Naoyuki Yoshino and Tomohiro Hirano
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Naoyuki Yoshino: Department of Economics Keio University Mita 2-15-45 Minato-ku Tokyo, Japan 108-8345 and Director of Financial Research Center (FSA Institute) Financial Services Agency (FSA) The Japanese Government
Tomohiro Hirano: Financial Research Center (FSA Institute) Financial Services Agency (FSA) The Japanese Government 3-2-1 Kasumigaseki Chiyoda-ku Tokyo, Japan 100-8967 Central common government offices No. 7

Asian Economic Papers, 2011, vol. 10, issue 2, pages 22-36

Abstract: This paper proposes replacing the present Basel capital requirement with a new counter-cyclical measure. Optimally, (i) the Basel capital requirement ratio should depend on various economic factors such as the cyclical stage of GDP, credit growth, stock prices, interest rates, and land prices—hence, avoiding the expansion of bank loans during a boom period and a credit crunch during a sluggish period; (ii) the Basel minimum capital requirement rule should be different from country to country since the economic structures and the behavior of banks are different; and (iii) cross-border bank operation should follow the minimum capital requirement ratio where bank lending activities occur rather than the origin of the source of funds. © 2011 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.

Date: 2011
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