Template-Type: ReDIF-Paper 1.0
Author-Name: Balázs Zsámboki
Author-X-Name-First: Balázs
Author-X-Name-Last: Zsámboki
Author-Email: zsambokib@mnb.hu
Author-Workplace-Name: Magyar Nemzeti Bank

Title: Basel II and financial stability: An investigation of sensitivity and cyclicality of capital requirements based on QIS 5

Abstract: This study aims to analyse the sensitivity of capital requirements to changes in risk parameters (PD, LGD and M) by creating a ‘model bank’ with a portfolio mirroring the average asset composition of internationally active large banks, as well as locally oriented smaller institutions participating in the QIS 5 exercise. Using historical data on corporate default rates, the dynamics of risk weights and capital requirements over a whole business cycle are also examined, with special emphasis on financial stability implications. The purpose of this paper is to contribute to a better understanding of the mechanism of Basel II and to explore the possible impacts of prudential regulation on cyclical swings in capital requirements.

Length: 43 pages
Creation-Date: 2007
File-URL: http://www.mnb.hu/letoltes/op-67.pdf
File-Format: Application/pdf

Number: 2007/67
Classification-JEL: G21, G28, G32.
Keywords: Basel II, credit risk, capital requirement, regulation, cyclicality, financial stability.
Handle: RePEc:mnb:opaper:2007/67