Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/19739
Authors: 
Heid, Frank
Year of Publication: 
2005
Series/Report no.: 
Discussion Paper, Series 2: Banking and Financial Supervision 2005,06
Abstract: 
Capital requirements play a key role in the supervision and regulation of banks. The Basel Committee on Banking Supervision is now changing the current framework by introducing risk-sensitive capital charges. There have been concerns that this will unduly increase volatility in the banks' capital. Furthermore, when the credit supply is rationed, capital requirements may exacerbate an economic downturn. We examine the problem of cyclicality in a macroeconomic model which explicitly takes regulatory constraints into account. We find that the capital buffer which banks hold on top of the required minimum plays a crucial role in mitigating the volatility in capital requirements. Therefore, despite the fact that capital charges may vary significantly over time, the effects on the macroeconomy will be moderate.
Subjects: 
minimum capital requirements
regulatory capital
economic capital
capital buffer
pro-cyclicality
business cycle
bank lending channel
JEL: 
E32
G21
E44
Document Type: 
Working Paper

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