Did Basel regulations cause a significant procyclicality

This paper examines the procyclical effect of risk-sensitive capital regulation on bank lending. We find evidence that the sensitivity of bank lending to the GDP is significantly positive under the internal rating-based approach. Our findings show that the risk-sensitive requirements of the Basel II and III regulations have procyclicale effects on bank lending in nine European countries. The introduction of the risk-sensitive capital requirement rule has a negative impact on lending in these countries. The policy implication is that regulators should place greater priority on building a buffer in advance, which can be used in times of stress rather than for dampening excess cyclicality.