The Effect of Basel II on the Sustainability of EMU: Pro-Cyclicality


Ersoy İ. S.

Future of the European Monetary Integration : 11th International Conference on Finance and Banking, ss.246-266, 2007 (Düzenli olarak gerçekleştirilen hakemli kongrenin bildiri kitabı)

  • Basım Tarihi: 2007
  • Dergi Adı: Future of the European Monetary Integration : 11th International Conference on Finance and Banking
  • Sayfa Sayıları: ss.246-266

Özet

The non alignment of the output gap cycles, the dispersion in annual growths and the developments in intra-area competitiveness are clear signs of the asymmetry in business cycles in EMU. Basel II seems will aggravate pro-cyclicality as the external ratings of the Standardized Approach and the internal ratings of IRB approaches are influenced themselves by cyclical movements. The CRD of EU, which is an adapted version of Basel II, is estimated to create even further pro-cyclicality in the bank based financial markets of EMU as it applies to all banks, investment firms and their clients regardless of the size. The implementation of CRD coincides with the change in financial behavior in terms of inherent pro-cyclicality introduced by globalization, encouraging asset price booms on the back of liquidity expansion and eased monetary policy. The CC policy alternatives developed, like further flattening of IRB, TTC rating, CC provisioning should complement Basel II. However, it seems they will have limited impact on dampening the pro-cyclicality of Basel II. In the new era, where financial imbalances manifest themselves increasingly as boom and busts, the monetary, fiscal and prudential policy frameworks should be changed to fight together against financial market imbalances for the sustainability of EMU.