Basel II procyclicality: The case of South Africa

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dc.contributor.authorLiu G.D.
dc.contributor.authorSeeiso N.E.
dc.date.accessioned2012-04-20T07:09:21Z
dc.date.available2012-04-20T07:09:21Z
dc.date.issued2012
dc.description.abstractThis paper studies the impact of bank capital regulation on business cycle fluctuations. In particular, we study the procyclical nature of Basel II claimed in the literature. To do so, we adopt the Bernanke et al. (1999) "financial accelerator" model (BGG), to which we augment a banking sector. We first study the impact of a negative shock to entrepreneurs' net worth and a positive monetary policy shock on business cycle fluctuations. We then look at the impact of a negative net worth shock on business cycle fluctuations when the minimum capital requirement increases from 8 percent to 12 percent. Our comparison studies between the augmented BGG model with Basel I bank regulation and the one with Basel II bank regulation suggest that, in the presence of credit market frictions and bank capital regulation, the liquidity premium effect further amplifies the financial accelerator effect through the external finance premium channel, which, in turn, contributes to the amplification of Basel II procyclicality. Moreover, under Basel II bank regulation, in response to a negative net worth shock, the liquidity premium and the external finance premium rise much more if the minimum bank capital requirement increases, which, in turn, amplify the response of real variables. Finally, small adjustments in monetary policy can result in stronger response in the real economy, in the presence of Basel II bank regulation in particular, which is undesirable. © 2011 Elsevier B.V.
dc.identifier.citationEconomic Modelling
dc.identifier.citation29
dc.identifier.citation3
dc.identifier.citation848
dc.identifier.citation857
dc.identifier.issn2649993
dc.identifier.other10.1016/j.econmod.2011.10.015
dc.identifier.urihttp://hdl.handle.net/10019.1/20781
dc.subjectBank capital requirement
dc.subjectBusiness cycle fluctuations
dc.subjectFinancial accelerator
dc.subjectMonetary policy
dc.titleBasel II procyclicality: The case of South Africa
dc.typeArticle
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