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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 19, No. 1, pp.3-41
ISSN: 1225-0279 (Print)
Print publication date 28 Feb 2006
Received 4 May 2005 Revised 28 Oct 2005

Bank Regulation and Macroeconomic Fluctuations

Charles Goodhart ; Boris Hofmann ; Miguel Segoviano
Professor. London School of Economics, Houghton Street. London WCZA 2AE., England U.K. CAEGOODHARTQaol.com
Doctor, Deutsche Bundesbank Central Office, Economics Department, Wilhelm Epstein Str. 14, D-60431 Frankfurt am Main, Germany, Tel: +49-69-9566-2518, Fax: +49-69-9566-3082 boris.hofmann8bundesbank.de
Economist, International Monetary Fund, 700 19th Street, N.W. Washington, D.C. 20431, U.S.A., Tel: +1-202-623-6260, Fax: +1-202-589-6260 msegoviano@imf.org

JEL Classfication: E30. E32, E44, E51. E63, G18, G28

Abstract

Over the last two decades, macroeconomic cycles were frequently associated with boom-bust cycles in bank lending and asset prices, often followed by financial instability. In this paper we argue that (i) the new pattern of macroeconomic cycles is partly the result of banking-sector liberalization since the early/mid-1970s. which has increased the procyclicality of the financial system; (ii) the regulation of bank capital in the form of capital adequacy requirements is itself inherently procyclical and may therefore amplify business-cycle fluctuations; (iii) the new Basel 11 Accord may considerably accentuate the procyclicality of the regulatory system.

Keywords:

Base1 11, Asset prices, Bank lending, Procyclicality

Acknowledgments

This is a reprinted version by an agreement of the Oxford Review of Economic Policy (Oxford University Press). Paper prepared for the 13th Seoul Journal of Econorntcs International Symposium held at Seoul National University. Seoul, 23 September 2005. Our thanks are due to the participants at the seminar at the Said Business School, Oxford, on July 1, 2004, and especially to C. J. Allsopp and C. Mayer, our main discussants.

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