The Countercyclical Capital Buffer of Basel III: A Critical Assessment

Rafael Repullo and Jesús Saurina ()

Working Papers from CEMFI

Abstract: We provide a critical assessment of the countercyclical capital buffer in the new regulatory framework known as Basel III, which is based on the deviation of the creditto- GDP ratio with respect to its trend. We argue that a mechanical application of the buffer would tend to reduce capital requirements when GDP growth is high and increase them when GDP growth is low, so it may end up exacerbating the inherent pro-cyclicality of risk-sensitive bank capital regulation. We also note that Basel III does not address pro-cyclicality in any other way. We propose a fully rule-based smoothing of minimum capital requirements based on GDP growth.

Date: 2011-03, Revised 2011-06
New Economics Papers: this item is included in nep-mac, nep-reg and nep-rmg
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Citations: View citations in EconPapers (116)

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Working Paper: The Countercyclical Capital Buffer of Basel III: A Critical Assessment (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:cmf:wpaper:wp2011_1102

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