SSRN Electronic Journal · 2011 · 132 citations · 0 references
Open access
LawEconomicsFinanceBank RegulationBankingFinancial EconomicsBank Capital AdequacyBanking RegulationBasel Regulatory FrameworkCapital RequirementsMacroprudential RegulationSystemic Risk RegulationBasel Capital FrameworkBasel Capital RegulationBasel Iii Capital FrameworkBasel Iii Capital StandardsBasel Iii ImplementationCapital Buffer FrameworkCounter-cyclical Capital BuffersCredit-to-gdp Gap
We provide a critical assessment of the countercyclical capital buffer in the new regulatory framework known as Basel III, which is based on the deviation of the credit-to-GDP ratio with respect to its trend. We argue that a mechanical application of the buffer would tend to reduce capital requirements when GDP growth is high and increase them when GDP growth is low, so it may end up exacerbating the inherent pro-cyclicality of risk-sensitive bank capital regulation. We also note that Basel III does not address pro-cyclicality in any other way. We propose a fully rule-based smoothing of minimum capital requirements based on GDP growth.