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Safe and Sound Banking: A Role for Countercyclical Regulatory Requirements?

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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 procyclical. This paper addresses the rationale for and likely contribution of such policies. Making provisioning (or capital) requirements countercyclical is one way potentially to address procyclicality, 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

  • Gerard Caprio, 2009. "Safe and Sound Banking: A Role for Countercyclical Regulatory Requirements?," Department of Economics Working Papers 2009-06, Department of Economics, Williams College.
    • Handle: RePEc:wil:wileco:2009-06
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    10. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    11. 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.
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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. 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.
    3. 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.
    4. Panayiotis P. Athanasoglou & Ioannis Daniilidis, 2011. "Procyclicality in the banking industry: causes, consequences and response," Working Papers 139, Bank of Greece.
    5. Canuto, Otaviano & Ghosh, Swati, 2013. "Dealing with the Challenges of Macro Financial Linkages in Emerging Markets," World Bank - Economic Premise, The World Bank, issue 129, pages 1-8, November.
    6. 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.
    7. 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.
    8. 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.
    9. repec:lan:wpaper:68464009 is not listed on IDEAS
    10. Tomislav Galac, 2010. "The Central Bank as Crisis-Manager in Croatia – A Counterfactual Analysis," Working Papers 27, The Croatian National Bank, Croatia.
    11. Chang, Soon-taek, 2010. "Mortgage lending in Korea : an example of a countercyclical macroprudential approach," Policy Research Working Paper Series 5505, The World Bank.
    12. 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.

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    More about this item

    Keywords

    Financial crisis; Securitization; Regulation and Supervision; Safety Nets;
    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
    • 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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