ISSN: 2225-8329
Open access
We perform detail analysis and review of capital regulation under Basel II including standardised and internal rating based approaches. We consider the parameters required for both approaches. Linkages between Basel II capital regulation and Procyclicality is established and we established the fact that even though procyclicality is inherent in banking sector, Basel II capital regulation has succeeded in exacerbating it particularly during the recent financial and economic crisis. We review the effects of procyclicality on the United Kingdom Bank lending decisions particularly during the economic crisis. This is compared with bank lending decisions pre crisis and post crisis period with a view to having holistic view of the effects. Our review covers main lending classifications in the UK. These include lending to businesses, secured lending to individuals and consumer lending. We conclude that Basel II capital regulation is not the genesis of procyclicality but one of the exacerbating factors. We assent to the fact that procyclicality genesis could be traced to failure of banks to efficiently allocate resources within the economy. Relevance of Basel II in improving risk management within banking sector is also emphasised.
Acharya, V. V., Bharath, S. T., and Srinivasan, A. (2004). “Understanding the recovery rates on defaulted securities”, London Business School Working Paper.
Altman, E. I. (2004). “Defaults and returns in the high yield bond market”, Altman – NYU Salomon Center Quarterly Report, February.
Altman, E. I., Resti, A., and Sironi, A. (2002). “The link between default and recovery rates: effects on the procyclicality of regulatory capital ratios”, BIS Working Papers, No 113.
Athanasoglou, P. P., and Daniilidis, L. (2011). Procyclicality in the Banking Industry: Causes, Consequences and Responses – Bank of Greece Working Paper
Barnhill, T. M., and Maxwell, W. F. (2002). “Modelling correlated interest rate, spread risk and credit risk for fixed income portfolios”, Journal of Banking and Finance, 25, No 2/3, pp. 347-374.
Basel Committee on Banking Supervision. (1988). International convergence of capital measurement and capital standards (BIS, Basel, Switzerland).
Basel Committee on Banking Supervision. (2006), International convergence of capital measurement and capital standards - A revised framework (BIS, Basel, Switzerland).
Berlin, M. (2009). “Bank credit standards”, Federal Reserve Bank of Philadelphia Business Review
Bernanke, B. S., and Lown, C. S. (1991). “The credit crunch”, Brookings Papers on Economic Activity, Vol. 1991, No 2, pp. 205-247.
Blum, J., and Hellwig, M. (1995). The macroeconomic implications of capital adequacy requirements for banks European Economic Review 39, 739-749.
Catarieneu-Rabell E., Jackson P., and Tsomocos D. (2005). “Procyclicality and the new Basel Accord – banks’ choice of loan rating systems”, Economic Theory, Vol. 26, No 3, pp. 537-557.
Drehmann, M., Borio, C., Gambacorta, L., Jimenez, G., and Trucharte, C. (2010). Countercyclical capital buffers: exploring options, Bank for International Settlements Working Paper No. 317, Basel, Switzerland.
Financial Stability Forum, (2009). ‘Report of the financial stability forum on addressing procyclicality in the financial system’, April.
Francis, W., and Osborne, M. (2009). “Bank regulation, capital and credit supply: measuring the impact of prudential standards”, Financial Services Authority Occasional Paper Series, No. 36.
Gordy, M. B., and Howells, B. (2004). Procyclicality in Basel II: Can We Treat the Disease without Killing the Patient? May 2004.
Gordy, M. B., and Howells, B. (2006). Procyclicality in Basel II: can we treat the disease without killing the patient?”, Journal of Financial Intermediation Vol. 15(3).
Gropp, R., and Heider, Fl. (2009). “The determinants of bank capital structure”, ECB Working Paper No 1096.
Jokipii, T., and Milne, A. (2008). “The cyclical behaviour of European bank capital buffers”, Journal of Banking and Finance 32, pp. 1440-1451.
Kashyap, A. K., and Stein, J. C. (2004). “Cyclical implications of the Basel II capital standards”, Federal Reserve Bank of Chicago Economic Perspectives Vol. 28 (1), pp. 18- 31.
Koehn, M., and Santomero, A. M. (1980). "Regulation of Bank Capital and Portfolio Risk." Journal of Finance 35 (December 1980), 1235-44.
Peura, S., and Jukivuolle, E. (2004). “Simulation based stress tests of banks’ regulatory capital adequacy”, Journal of Banking and Finance, Vol. 28.
Puri, M., Rocholl, J., and Steffen, S. (2010). “Global retail lending in the aftermath of the U.S. financial crisis: distinguishing between supply and demand effects”, Journal of Financial Economics.
Saurina, J. (2008). “Banking on the right path”, in “Will Basel II help prevent crises or worsen them?”, Finance and Development Magazine, Vol. 45 (2).
Taylor, A., and Goodhart, C. (2004). “Procyclicality and volatility in the financial system: the implementation of Basel II and IAS 39”, London School of Economics, FMG Discussion Paper.
VanHoose, D. (2008). “Bank capital regulation economic stability, and monetary policy: what does the academic literature tell us?”, Atlantic Economic Journal, Vol. 36 (1).
Zakrajsek, E., Carpenter, S. B., and Whitesell, W. C. (2001). “Capital requirements, business loans and business cycles: An empirical analysis of the standardized approach in the new Basel Capital Accord” Board of Governors of the Federal Reserve System - Finance and Economics Discussion Series, No. 2001-48.
In-Text Citation: (Salaam, 2015)
To Cite this Article: Salaam, K. O. (2015). Procyclicality Effects on Bank Lending Decisions: A Case Study of the British Banking Sector. International Journal of Academic Research in Accounting Finance and Management Sciences, 5(2), 240–251.
Copyright: © 2015 The Author(s)
Published by Human Resource Management Academic Research Society (www.hrmars.com)
This article is published under the Creative Commons Attribution (CC BY 4.0) license. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this license may be seen at: http://creativecommons.org/licences/by/4.0/legalcode