The cyclical effects of the Basel II capital requirements

Heid, Frank

doi:10.1016/j.jbankfin.2007.03.004

Cited by 130 publications

(88 citation statements)

References 21 publications

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“…8 Moreover, because Pillar III requires improved transparency, it may be difficult for a bank to retain its capital adequacy levels near the minimum throughout the entire business cycle and not to provoke a reaction from stakeholders. The importance of capital buffers in mitigating significantly Basel's procyclicality has been confirmed empirically by Peura and Jokivuolle (2004) and Heid (2007).…”

Section: Arguments In Favor Of the Counter-cyclical Behavior Of Basel IImentioning

confidence: 75%

Bank procyclicality and output: Issues and policies

Athanasoglou¹,

Daniilidis

Delis

2014

Journal of Economics and Business

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The recent global financial crisis has highlighted the importance of the procyclicality of the financial sector. The procyclicality has transformed banks from mitigation mechanisms to amplifiers of changes in economic activity, potentially affecting financial stability and economic growth. The causes of procyclicality can be attributed to market imperfections and deviations from the efficient market hypothesis, while other factors including the Basel-type regulations, accounting standards and leverage have exacerbated it. Several suggestions have been forwarded to attenuate procyclicality, in the form of rules and discretion. They are presented here according to the factors they aim to alleviate. Some of the suggestions have been adopted under the Basel III framework, which explicitly addresses the procyclicality issue.

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Section: Arguments In Favor Of the Counter-cyclical Behavior Of Basel IImentioning

confidence: 75%

Bank procyclicality and output: Issues and policies

Athanasoglou¹,

Daniilidis

Delis

2014

Journal of Economics and Business

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“…Basel II has sparked substantial debate and scholarly interest in recent years regarding, among others, internal risk rating systems (Jacobson, Lindé & Roszbach 2006), a potential pro-cyclical effect of the regulation on lending cycles (Gordy & Howells 2006, Heid 2007, proposals for forward-looking modeling of default probabilities (Pederzoli & Torricelli 2005), and country-specific differences in the implementation of the new regulation (Barth, Caprio & Levine 2008, Herring 2007. In contrast, the effect of Basel II on the market valuation of discretionary loan loss provisions (DLLPs) has yet to receive attention.…”

Section: Introductionmentioning

confidence: 99%

Does Basel II affect the market valuation of discretionary loan loss provisions?

Hamadi

Heinen

Linder

et al. 2016

Journal of Banking & Finance

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We use a sample of banks from 24 European countries to investigate whether the adoption of the Basel II Capital Accord in 2008 affects the market valuation of discretionary loan loss provisions (DLLPs). Although Basel II lowers the incentives of internal ratingsbased (IRB) banks to recognize income-increasing DLLPs in an opportunistic manner, it has no such impact on the remaining banks, which adopt the Standardized methodology. We use this setup in a difference-in-difference (DiD) design, where Standardized banks act as a control group. Our evidence supports the three hypotheses that, for IRB relative to Standardized banks, Basel II is associated with (i) less income-increasing DLLPs and (ii) less income-smoothing via DLLPs, which enhances the informational content of DLLPs about future loan losses and leads to (iii) higher market valuation of DLLPs. Our findings are timely and have policy implications for future regulatory developments in the banking industry.

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“…Procyclical risk analysis is now one of the main concerns for researchers working in the field of financial institutions, especially in banking research and macroprudential analysis (Amato and Furfine, 2004;Heid, 2007;Rajan, 2005Rajan, , 2009Shin, 2009;Adrian and Shin, 2010;Jacques, 2010;Gennaioli et al, 2011). However, these analyses are often cast in a static setting.…”

Section: Introductionmentioning

confidence: 99%

The procyclicality of hedge fund alpha and beta

Racicot

Théoret²

2013

J Deriv Hedge Funds

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François-Éric Racicotis Associate Professor of Finance at the Telfer School of Management, University of Ottawa. His research interests focus on the problems of measurement errors, specification errors and endogeneity in financial models of returns. He is also interested in developing new methods used for forecasting financial time series − especially hedge fund risk. He has published several books and many articles in quantitative finance and financial econometrics. Raymond Théoretis Full Professor of Finance at École des sciences de la Gestion, University of Quebec − Montreal (UQAM). His research focuses on banking systemic risk and hedge fund risk. He has published many books in asset pricing and many articles in the banking and hedge fund areas in well-known journals.Correspondence: François-Éric Racicot, Telfer School of Management, CGA-Canada Accounting and Governance Research Centre, University of Ottawa, 55 Laurier Avenue East, Ottawa, ON, K1N 6N5 Canada E-mail: Racicot@telfer.uottawa.ca ABSTRACT Traditional financial institutions as banks follow procyclical risk strategies, that is, they increase their leverage in economic expansions and reduce it in contractions, which leads to a procyclical behaviour for their betas and other risk and financial performance measures. We study the cyclical aspects of hedge fund strategies, an issue quite overlooked in the literature. We rely on two procedures: conditional modelling and Kalman filtering of hedge funds' alpha and beta. We find that hedge fund betas are usually procyclical. Our results also show that the alpha is often high at the beginning of a market upside cycle but, as the demand pressure increases, it progressively shrinks, which suggests that the alpha puzzle ought to be analysed in a dynamic setting.

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The cyclical effects of the Basel II capital requirements

Cited by 130 publications

References 21 publications

Bank procyclicality and output: Issues and policies

Bank procyclicality and output: Issues and policies

Does Basel II affect the market valuation of discretionary loan loss provisions?

The procyclicality of hedge fund alpha and beta

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