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Safe and Sound Banking: A Role for Countercyclical Regulatory Requirements?

Gerard Caprio, Jr. Williams College And IIIS, Trinity College, Dublin


Most explanations of the crisis of 2007-2009 emphasize the role of the preceding boomin real estate and asset markets in a variety of advanced countries.As a result, an idea that is gainingsupport among various groups is how to make Basel II or any regulatory regime less procyclical. This paper addresses the rationale for and likely contribution of such policies.Making provisioning(or capital) requirements countercyclical is one way potentially to address procyclicality, andaccordingly it looks at the efforts of the uthorities in Spain and Colombia, two countries in whichcountercyclical provisioning has been tried, to see what the track record has been.As explainedthere, these experiments have been at best too recent and limited to put much weight on them, butthey are much less favorable for supporting this practice than is commonly admitted.The paperthen addresses concerns and implementation issues with countercyclical capital or provisioningrequirements, including why their impact might be expected to be limited, and concludes withrecommendations for developing country officials who want to learn how to make their financialsystems less exposed to crises.

Last updated 28 August 2014 by IIIS (Email).