A forward-looking model for time-varying capital requirements and the New Basel Capital Accord

Costanza Torricelli and Chiara Pederzoli ()

Department of Economics from University of Modena and Reggio E., Faculty of Economics "Marco Biagi"

Abstract: This paper proposes a forward-looking model for time-varying capital requirements which finds application within the New Basel Capital Accord (NBCA) framework. The model aims at reconciling two somewhat contrasting objectives of the NBCA proposal: introducing risk-sensitive capital requirements and avoiding at the same time procyclical effects. The model rests on the relationship existing between default rates and the business cycle phases and proposes a modelisation of the default probabilities which is based on a business cycle forecast over the credit horizon. The model is applied to US data over the forecasting period 1971-2002: despite a failure in predicting the early nineties recession, the objective of raising the capital requirements in anticipation of a recessions is in general satisfied. The results obtained are interesting as they suggest that there is room for dampening procyclicality of capital requirements even within a risk-sensitive framework.

Keywords: capital requirement; default probability; business cycle; procyclicality (search for similar items in EconPapers)
JEL-codes: C32 G21 G28 (search for similar items in EconPapers)
Pages: pages 29
Date: 2004-02
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Published in Journal of Banking and Finance, Vl. 29, 12, 2005

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Persistent link: https://EconPapers.repec.org/RePEc:mod:depeco:0453

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