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Did Basel regulations cause a significant procyclicality?

Author

Listed:
  • Katsutoshi Shimizu

    (Department of Economics, Nagoya University)

  • Kim Cuong Ly

    (School of Management, Swansea University)

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.

Suggested Citation

  • Katsutoshi Shimizu & Kim Cuong Ly, 2018. "Did Basel regulations cause a significant procyclicality?," Working Papers 2018-06, Swansea University, School of Management.
    • Handle: RePEc:swn:wpaper:2018-06
    as

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    File URL: https://rahwebdav.swan.ac.uk/repec/pdf/WP2018-06.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Bank capital; Basel regulation; macro-prudential policy; business cycle; procyclicality; buffer capital; countercyclical buffer.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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