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Countercyclical Macroprudential Tools

Published online by Cambridge University Press:  26 March 2020

Jesús Saurina
Jesús Saurina*
Affiliation:
Department at the Banco de España
*
e-mail [email protected]
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Abstract

Risk-sensitive capital requirements, such as those established in Basel 2/3, and loan loss provisions based on incurred losses or on short-horizon expected losses, increase procyclicality in the banking system. They could, therefore, contribute to fuelling credit bubbles in good times, as rising risks are not properly covered either with capital or provisions, and credit crunches in bad times, as requirements are sharply increased to compensate for the former undercapitalisation and under-provisioning, and banks respond by cutting credit to households and firms. This paper shows that the procyclicality of current and envisaged capital requirements and loan loss provisions is a serious concern. But, at the same time, it can be dealt with using countercyclical macroprudential tools, first, by smoothing minimum capital requirements using a very simple and intuitive formula based on GDP growth and, secondly, by using forward-looking provisions such as the Spanish dynamic provisions, a working macroprudential mechanism for more than a decade and a full lending cycle.

Keywords

Macroprudential toolsprocyclicalitybank capital regulationBasel 3dynamic provisionsbusiness cyclescredit boomcredit crunchE32G28
Type
Research Articles
Information
National Institute Economic Review , Volume 216 , April 2011 , pp. R16 - R28
Copyright
Copyright © 2011 National Institute of Economic and Social Research

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Footnotes

∗

This paper is the sole responsibility of its author and the views represented here do not necessarily reflect those of the Banco de España or the Eurosystem. This paper draws significantly on Saurina (2009a,b), Saurina (2011), and Repullo, Saurina and Trucharte (2010). I would like to thank an anonymous referee for very helpful comments. Any errors that remain are, however, entirely my own.

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