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Safe and sound banking : a role for countercyclical regulatory requirements ?

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  • Caprio, Gerard, Jr.

Abstract

Most explanations of the crisis of 2007-2009 emphasize the role of the preceding boom in real estate and asset markets in a variety of advanced countries. As a result, an idea that is gaining support among various groups is how to make Basel II or any regulatory regime less pro-cyclical. This paper addresses the rationale for and likely contribution of such policies. Making provisioning (or capital) requirements countercyclical is one way potentially to address pro-cyclicality, and accordingly it looks at the efforts of the authorities in Spain and Colombia, two countries in which countercyclical provisioning has been tried, to see what the track record has been. As explained there, these experiments have been at best too recent and limited to put much weight on them, but they are much less favorable for supporting this practice than is commonly admitted. The paper then addresses concerns and implementation issues with countercyclical capital or provisioning requirements, including why their impact might be expected to be limited, and concludes with recommendations for developing country officials who want to learn how to make their financial systems less exposed to crises.

Suggested Citation

  • Caprio, Gerard, Jr., 2010. "Safe and sound banking : a role for countercyclical regulatory requirements ?," Policy Research Working Paper Series 5198, The World Bank.
    • Handle: RePEc:wbk:wbrwps:5198
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    1. Gerard Caprio, Jr. Williams College, 2009. "Financial Regulation in a Changing World: Lessons from the Recent Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp308, IIIS.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
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    5. Gary Gorton, 2008. "The panic of 2007," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 131-262.
    6. Caprio Jr., Gerard, 1997. "Safe and sound banking in developing countries : we're not in Kansas anymore," Policy Research Working Paper Series 1739, The World Bank.
    7. Barth,James R. & Caprio,Gerard & Levine,Ross, 2008. "Rethinking Bank Regulation," Cambridge Books, Cambridge University Press, number 9780521709309, January.
    8. Kenneth N. Kuttner & Patricia C. Mosser, 2002. "The monetary transmission mechanism: some answers and further questions," Economic Policy Review, Federal Reserve Bank of New York, vol. 8(May), pages 15-26.
    9. Claudio Borio & Craig Furfine & Philip Lowe, 2001. "Procyclicality of the financial system and financial stability: issues and policy options," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 1-57, Bank for International Settlements.
    10. Goodhart, C.A.E., 2008. "The regulatory response to the financial crisis," Journal of Financial Stability, Elsevier, vol. 4(4), pages 351-358, December.
    11. Laeven, L., 2011. "Bank governance and regulation," Other publications TiSEM d5f6383c-1e7c-48c7-b705-c, Tilburg University, School of Economics and Management.
    12. Charles A. E. Goodhart, 2008. "The Regulatory Response to the Financial Crisis," CESifo Working Paper Series 2257, CESifo.
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    Cited by:

    1. Koch, Timothy W. & Waggoner, Daniel F. & Wall, Larry D., 2018. "Incentive compensation, accounting discretion and bank capital," Journal of Economics and Business, Elsevier, vol. 95(C), pages 119-140.
    2. repec:lan:wpaper:68464009 is not listed on IDEAS
    3. Otaviano Canuto & Swati R. Ghosh, 2013. "Dealing with the Challenges of Macro Financial Linkages in Emerging Markets," World Bank Publications - Books, The World Bank Group, number 16202.
    4. Tomislav Galac, 2010. "The Central Bank as Crisis-Manager in Croatia – A Counterfactual Analysis," Working Papers 27, The Croatian National Bank, Croatia.
    5. Benyovszki Annamaria & Bordas Eszter & Kurti Laszlo - Adam & Szodorai Melinda, 2011. "Troubleshooting Basel Ii: The Issue Of Procyclicality," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 461-468, July.
    6. Athanasoglou, Panayiotis P. & Daniilidis, Ioannis & Delis, Manthos D., 2014. "Bank procyclicality and output: Issues and policies," Journal of Economics and Business, Elsevier, vol. 72(C), pages 58-83.
    7. Wilson, John O.S. & Casu, Barbara & Girardone, Claudia & Molyneux, Philip, 2010. "Emerging themes in banking: Recent literature and directions for future research," The British Accounting Review, Elsevier, vol. 42(3), pages 153-169.
    8. Cousin, Violaine, 2011. "中监为体、西监为用 or the specifics of Chinese bank regulation," MPRA Paper 36040, University Library of Munich, Germany.
    9. Chang, Soon-taek, 2010. "Mortgage lending in Korea : an example of a countercyclical macroprudential approach," Policy Research Working Paper Series 5505, The World Bank.
    10. Paweł Smaga, 2013. "Wpływ Europejskiej Rady Ryzyka Systemowego na stabilność finansową w UE," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 3, pages 5-35.
    11. Agénor, Pierre-Richard & Zilberman, Roy, 2015. "Loan Loss Provisioning Rules, Procyclicality, and Financial Volatility," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 301-315.
    12. Panayiotis P. Athanasoglou & Ioannis Daniilidis, 2011. "Procyclicality in the banking industry: causes, consequences and response," Working Papers 139, Bank of Greece.

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    More about this item

    Keywords

    Urban Housing and Land Settlements; Urban Governance and Management; Urban Housing; Financial Crisis Management & Restructuring; Macroeconomic Management; Municipal Management and Reform; Deposit Insurance; Financial Sector Policy;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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