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Did Basel regulations cause a significant procyclicality?

Katsutoshi Shimizu and Kim Ly
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Katsutoshi Shimizu: Department of Economics, Nagoya University
Kim Ly: School of Management, Swansea University

No 2018-06, Working Papers from Swansea University, School of Management

Abstract: This paper examines the procyclical effect of risk-sensitive capital regulation on bank lending. We find evidence that the sensitivity of bank lending to the GDP is significantly positive under the internal rating-based approach. Our findings show that the risk-sensitive requirements of the Basel II and III regulations have procyclicale effects on bank lending in nine European countries. The introduction of the risk-sensitive capital requirement rule has a negative impact on lending in these countries. The policy implication is that regulators should place greater priority on building a buffer in advance, which can be used in times of stress rather than for dampening excess cyclicality.

Keywords: Bank capital; Basel regulation; macro-prudential policy; business cycle; procyclicality; buffer capital; countercyclical buffer. (search for similar items in EconPapers)
JEL-codes: G21 G28 G18 G14 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
Date: 2018-02-01
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