Procyclicality of Buffer Capital and Its Implications for Basel II: A Cross Country Analysis

• Main Author: Lee, Hang yong
• Format: Article
• Language: English
• Published: Korea Development Institute 2007-06-01
• Series: KDI Journal of Economic Policy
• Subjects: Basel II(신바젤협약); Regulatory Capital(규제자본); Buffer Capital(잉여자본); Business Cycle(경기순환); Procyclicality(경기순응성)
• Online Access: https://doi.org/10.23895/kdijep.2005.29.1180

This paper investigates the cyclical patterns of buffer capital using an unbalanced panel data for the banks in 30 OECD countries and 7 non-OECD Asian countries. We test whether the relationships between buffer capital and business cycle are systematically different across country groups controlling for other potential determinants of bank capital. We find that the correlation is positive for developed countries while it is negative for Asian developing countries. These findings suggest that, once Basel II is implemented, developing countries are more likely to observe an increase in output volatility. We then review the policy recommendations to mitigate the procyclicality problem of Basel II.