The pro-cyclicality of risk weights for credit exposures: Driven by the retail segment

Simona Malovana

Economic Systems, 2021, vol. 45, issue 1

Abstract: This paper examines the pro-cyclicality of implicit risk weights of credit exposures and the potential contribution of accommodative monetary policy using data for the Czech Republic. The empirical results indicate that risk weights behave pro-cyclically under the IRB approach and acyclically under the STA approach. The pro-cyclical behaviour of IRB risk weights is caused primarily by the retail exposures, the strongest effects being in the highest and lowest quantiles of risk weights. The risk weights for retail exposures behave pro-cyclically not only with regard to the business cycle, but also with respect to the financial cycle and house price growth. In addition, monetary policy easing contributes to the pro-cyclicality in higher quantiles of risk weights.

Keywords: Internal ratings-based approach; Monetary policy; Procyclicality; Retail exposures; Risk weights (search for similar items in EconPapers)
JEL-codes: C22 E32 G21 G28 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:45:y:2021:i:1:s0939362520300704

DOI: 10.1016/j.ecosys.2020.100763

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