Safe and Sound Banking: A Role for Countercyclical Regulatory Requirements?

39 Pages Posted: 23 Jul 2010 Last revised: 20 Nov 2010

Multiple version iconThere are 3 versions of this paper

Date Written: 2010

Abstract

Most explanations of the crisis of 2007-2009 emphasize the role of the preceding boom in real estate and asset markets in a variety of advanced countries. As a result, an idea that is gaining support among various groups is how to make Basel II or any regulatory regime less procyclical.

This paper addresses the rationale for and likely contribution of such policies. Making provisioning (or capital) requirements countercyclical is one way potentially to address procyclicality, and accordingly it looks at the efforts of the authorities in Spain and Colombia, two countries in which countercyclical provisioning has been tried, to see what the track record has been. As explained there, these experiments have been at best too recent and limited to put much weight on them, but they are much less favorable for supporting this practice than is commonly admitted.

The paper then addresses concerns and implementation issues with countercyclical capital or provisioning requirements, including why their impact might be expected to be limited, and concludes with recommendations for developing country officials who want to learn how to make their financial systems less exposed to crises.

Keywords: Financial crisis, Securitization, Regulation and Supervision, Safety Nets

JEL Classification: G21, G28, G32

Suggested Citation

Caprio, Gerard, Safe and Sound Banking: A Role for Countercyclical Regulatory Requirements? (2010). Paolo Baffi Centre Research Paper No. 2010-76. Available at SSRN: https://ssrn.com/abstract=1646905 or http://dx.doi.org/10.2139/ssrn.1646905

Gerard Caprio (Contact Author)

Williams College ( email )

Williamstown, MA 01267
United States
413-597-2465 (Phone)
413-597-4045 (Fax)

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