The Basel committee has proposed a New Capital Accord (NCA) which introduces a new methodology to calculate the minimum capital requirements considering that in the new accord, the capital requirements are more sensitive to risk. The loans offered by financial institutions and the risk measurement, in particular, show a very cyclical behavior. This means that both variables are strongly related with the rest of the macroeconomic variables through time. In this way, the risks that are perceived by the financial institutions are likely to be reduced strongly when we are through an expansionary phase, whereas in a recession, they tend to increase. This is the main reason why a new regulation that would make capital requirements more sensitive to risk measurement, which already has a cyclical component, could introduce an additional pro-cyclical factor which in time could be dangerous becaus...

The Basel committee has proposed a New Capital Accord (NCA) which introduces a new methodology to calculate the minimum capital requirements considering that in the new accord, the capital requirements are more sensitive to risk. The loans offered by financial institutions and the risk measurement, in particular, show a very cyclical behavior. This means that both variables are strongly related with the rest of the macroeconomic variables through time. In this way, the risks that are perceived by the financial institutions are likely to be reduced strongly when we are through an expansionary phase, whereas in a recession, they tend to increase. This is the main reason why a new regulation that would make capital requirements more sensitive to risk measurement, which already has a cyclical component, could introduce an additional pro-cyclical factor which in time could be dangerous becaus...