Quantifying the Cyclicality of Regulatory Capital – First Evidence from Austria

Stefan Kerbl and Michael Sigmund

Financial Stability Report, 2009, issue 18, 93-103

Abstract: With the financial crisis spreading to the real economy, the discussion about potential procyclical implications of Basel II received a surge of attention. While existing research approaches the topic either from a theoretical perspective or from an empirical perspective that draws on simulated data, we are first in studying the cyclicality of risk weights on the basis of realized data. Furthermore, we are able to differentiate not only between Basel I and Basel II, but also between the Standardized Approach (StA) and the internal ratings-based (IRB) approach. We argue that without knowledge of these approaches’ presumably distinct cyclicality of risk weights, any measure to dampen procyclicality is premature. For this purpose, we first study which banks opt for implementation of the IRB approach and then set up a panel model to quantify the cyclicality of capital requirements. While we find no evidence of cyclicality in portfolios subject to the Basel II StA, we find economically substantial and statistically significant effects in IRB portfolios.

Date: 2009
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