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24 Sep 09
Mitigating the procyclical effects of bank capital regulation | vox - Research-based policy analysis and commentary from leading economists
Under the internal ratings-based approach of Basel II, capital requirements are an increasing function of the probability of default, loss given default, and the exposure at default, and these inputs are likely to rise in downturns. Thus, when a recession worsens borrowers’ creditworthiness, it significantly increases banks’ capital requirement, contracting the supply of credit.
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