The Countercyclical Capital Buffer of Basel III: A Critical Assessment

Year Published 2011
Business unit: Special Projects
Resource type: Discussion papers
File type: PDF
Theme(s): Economic Development, Finance, Policy analysis

Description

in CEMFI Working Paper No. 1102 Rafael Repullo and Jesús Saurina 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 creditto-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.

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