Did Basel regulation cause a significant procyclicality?

Ly, Kim Cuong; Shimizu, Katsutoshi

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 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 procyclical effects on bank lending in nine European countries. The introduction of the risk-sensitive capital requirement rule negatively impacts 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.

Citation

Ly, K. C., & Shimizu, K. (2021). Did Basel regulation cause a significant procyclicality?. Journal of International Financial Markets, Institutions and Money, 73, Article 101365. https://doi.org/10.1016/j.intfin.2021.101365

• Journal Article Type: Article
• Acceptance Date: May 23, 2021
• Online Publication Date: Jul 5, 2021
• Publication Date: Jul 1, 2021
• Deposit Date: Jul 12, 2021
• Publicly Available Date: Jul 2, 2022
• Journal: Journal of International Financial Markets, Institutions and Money
• Print ISSN: 1042-4431
• Electronic ISSN: 1873-0612
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 73
• Article Number: 101365
• DOI: https://doi.org/10.1016/j.intfin.2021.101365
• Keywords: Basel regulation, business cycle, procyclicality, buffer capital
• Public URL: https://nottingham-repository.worktribe.com/output/5781559
• Publisher URL: https://www.sciencedirect.com/science/article/abs/pii/S1042443121000846