How to Deal with Basel II Procyclicality in Russia ?

Content Provider	Semantic Scholar
Author	Andrievskaya, Irina K. Penikas, Henry
Copyright Year	2010
Abstract	The Central Bank of Russia initiated introduction of the Basel II basic indicator approach to operational risk measurement of banking institutions starting form July 01, 2010. The complete set of Basel II rules is expected to be introduced in the nearest future. Given the during-the-crisis consequences of Basel II regulation, its impact on Russian banking system is to be tested in order to work out policy options for maintaining the stability of the banking system of Russia. For the purpose two hypotheses are examined and two policy options are calibrated to the obtained results. Primarily, the procyclicality effect of capital adequacy ratio for the whole banking system as if Basel II was introduced is analyzed. Secondly, the procyclicality of risk components is verified. Based on the findings two policy options are regarded in order to dampen the volatility of the system’s capital adequacy dynamics. The research is based on the publicly available and disclosed by the Central Bank of Russia financial statements of the Russian banks (forms F-101 and F-102). The data set includes quarterly data from 2004Q1 to 2010Q1 for all the 1200 banks. 1.5% of datapoints was omitted as outliers. The methodology to test for the procyclicality of the capital adequacy ratio comported using the empirical joint distribution of risks using the proxies for the credit, market, and operational risks. The value-at-risk methodology was applied using the confidence level of 99.5% following from Basel II recommendations. The retrospective analysis has revealed the procyclical nature of Basel II capital requirements when capital adequacy could have reached 4.5% in the recession periods and 15% in the boom times (given the official ratio based on Basel I rules to slightly move in the nearby of 17%). Given the estimated results capital buffer creation of RUB 2.1 trln (EUR 52 bn) and IRB-models confidence level calibration in-between 98.1% and 99.9% are proposed to stabilize the system’s capital adequacy at the level of 10%. The research undertaken has highlightened the necessity for further analysis of Basel II implementation consequences in Russia including the alternative measures of Central Bank to dampen the procyclicality within the current trends. The trends to be accounted for are banking institutions’ consolidation and the improvement in the efficiency of the lending mechanism to redistribute the Central Banks funds to the industrial enterprises and SMEs. JEL Classification Codes: G10, G20, G28
File Format	PDF HTM / HTML
Alternate Webpage(s)	https://www.hse.ru/data/2011/06/20/1215788555/Procyclicality_Russia.pdf
Language	English
Access Restriction	Open
Content Type	Text
Resource Type	Article