The Countercyclical Capital Buffer of Basel III: A Critical Assessment

32 Pages Posted: 28 Mar 2011

See all articles by Rafael Repullo

Rafael Repullo

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Jesus Saurina Salas

Banco de España

Date Written: March 2011

Abstract

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.

Keywords: Bank capital regulation, Basel III, Business cycles, Credit crunch, Pro-cyclicality

JEL Classification: E32, G28

Suggested Citation

Repullo, Rafael and Saurina Salas, Jesus, The Countercyclical Capital Buffer of Basel III: A Critical Assessment (March 2011). CEPR Discussion Paper No. DP8304. Available at SSRN: https://ssrn.com/abstract=1794894

Rafael Repullo (Contact Author)

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91429 0551 (Phone)
+34 91429 1056 (Fax)

HOME PAGE: http://www.cemfi.es/~repullo/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Jesus Saurina Salas

Banco de España ( email )

Madrid 28014
Spain

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