EFFECTIVENESS of the BASEL III FRAMEWORK: PROCYCLICALITY in the BANKING SECTOR and MACROECONOMIC FLUCTUATIONS

Jinyoung Yu; Doojin Ryu

doi:10.1142/S0217590820460066

EFFECTIVENESS of the BASEL III FRAMEWORK: PROCYCLICALITY in the BANKING SECTOR and MACROECONOMIC FLUCTUATIONS

Jinyoung Yu, Doojin Ryu^*

^*Corresponding author for this work

Sungkyunkwan University

Research output: Contribution to journal › Article › peer-review

11 Citations (Scopus)

Abstract

This study examines the effectiveness of the Basel III capital framework for mitigating procyclical behavior in the banking sector regarding macroeconomic variability and uncertainty. Our sample includes Korean banking industry data from 2001 to 2018. Using fixed- and random-effects panel data and fixed-effects difference-in-differences approaches, we discover that procyclicality in banks' performance and capital factors is mitigated after the Basel III accord is adopted. The capital adequacy ratio's volatility increases, whereas the loans-to-assets ratio increases and stabilizes. The Basel III accord therefore effectively serves its intended purpose, as it encourages banks to serve as shock absorbers for the economy and reduces economic uncertainty.

Original language	English
Pages (from-to)	855-879
Number of pages	25
Journal	Singapore Economic Review
Volume	66
Issue number	3
DOIs	https://doi.org/10.1142/S0217590820460066
Publication status	Published - Jun 2021
Externally published	Yes

Keywords

Bank procyclicality
Basel III
business cycle
difference-in-differences
economic uncertainty
panel data regression

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10.1142/S0217590820460066

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title = "EFFECTIVENESS of the BASEL III FRAMEWORK: PROCYCLICALITY in the BANKING SECTOR and MACROECONOMIC FLUCTUATIONS",

abstract = "This study examines the effectiveness of the Basel III capital framework for mitigating procyclical behavior in the banking sector regarding macroeconomic variability and uncertainty. Our sample includes Korean banking industry data from 2001 to 2018. Using fixed- and random-effects panel data and fixed-effects difference-in-differences approaches, we discover that procyclicality in banks' performance and capital factors is mitigated after the Basel III accord is adopted. The capital adequacy ratio's volatility increases, whereas the loans-to-assets ratio increases and stabilizes. The Basel III accord therefore effectively serves its intended purpose, as it encourages banks to serve as shock absorbers for the economy and reduces economic uncertainty.",

keywords = "Bank procyclicality, Basel III, business cycle, difference-in-differences, economic uncertainty, panel data regression",

author = "Jinyoung Yu and Doojin Ryu",

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year = "2021",

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language = "English",

volume = "66",

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T2 - PROCYCLICALITY in the BANKING SECTOR and MACROECONOMIC FLUCTUATIONS

AU - Yu, Jinyoung

AU - Ryu, Doojin

PY - 2021/6

Y1 - 2021/6

N2 - This study examines the effectiveness of the Basel III capital framework for mitigating procyclical behavior in the banking sector regarding macroeconomic variability and uncertainty. Our sample includes Korean banking industry data from 2001 to 2018. Using fixed- and random-effects panel data and fixed-effects difference-in-differences approaches, we discover that procyclicality in banks' performance and capital factors is mitigated after the Basel III accord is adopted. The capital adequacy ratio's volatility increases, whereas the loans-to-assets ratio increases and stabilizes. The Basel III accord therefore effectively serves its intended purpose, as it encourages banks to serve as shock absorbers for the economy and reduces economic uncertainty.

AB - This study examines the effectiveness of the Basel III capital framework for mitigating procyclical behavior in the banking sector regarding macroeconomic variability and uncertainty. Our sample includes Korean banking industry data from 2001 to 2018. Using fixed- and random-effects panel data and fixed-effects difference-in-differences approaches, we discover that procyclicality in banks' performance and capital factors is mitigated after the Basel III accord is adopted. The capital adequacy ratio's volatility increases, whereas the loans-to-assets ratio increases and stabilizes. The Basel III accord therefore effectively serves its intended purpose, as it encourages banks to serve as shock absorbers for the economy and reduces economic uncertainty.

KW - Bank procyclicality

KW - Basel III

KW - business cycle

KW - difference-in-differences

KW - economic uncertainty

KW - panel data regression

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SN - 0217-5908

VL - 66

SP - 855

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JO - Singapore Economic Review

JF - Singapore Economic Review

IS - 3

ER -

EFFECTIVENESS of the BASEL III FRAMEWORK: PROCYCLICALITY in the BANKING SECTOR and MACROECONOMIC FLUCTUATIONS

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Keywords

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