The Countercyclical Capital Buffer of Basel III: A Critical Assessment

Rafael Repullo and Jesús Saurina

No 8304, CEPR Discussion Papers from Centre for Economic Policy Research

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 credit-to-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.

Keywords: Bank capital regulation; Basel iii; Business cycles; Credit crunch; Pro-cyclicality (search for similar items in EconPapers)
JEL-codes: E32 G28 (search for similar items in EconPapers)
Date: 2011-03
New Economics Papers: this item is included in nep-ban, nep-bec and nep-mac
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Citations: View citations in EconPapers (134)

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Working Paper: The Countercyclical Capital Buffer of Basel III: A Critical Assessment (2011)
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