Procyclicality Effects on Bank Lending Decisions: A Case Study of the British Banking Sector

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.Classification-JEL: