AND THE ICELANDIC BANKING SECTOR

• Main Authors: Gudmundur Magnusson, Saso Andonov, Iceland Guðmundur Magnússon
• Other Authors: The Pennsylvania State University CiteSeerX Archives
• Format: Text
• Language: English
• Published: 2002
• Subjects: Quantitative Impact; Structural Changes and Stability Considerations; Iceland
• Online Access: http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.203.2134; http://www.ioes.hi.is/publications/wp/w0205.pdf

Capital regulations set on an international level can play a significant role in ensuring that internationally active banks have adequate level and structure of capital. The benchmark framework, known as Basle capital adequacy framework, specifically addresses this issue with respect to the internationally active banks. It provides quantitative rules on the desired level of economic capital requirements that each bank should aim at ensuring stable and efficient financial position. These rules affect directly the bank´s behaviour, mostly with respect to lending and borrowing activities. However, the concept also influences agents whose core businesses are not solely in the financial area. In general, these rules affect the overall macroeconomy, mostly through the channel of lending. This paper attempts to focus on the two-level approach of the capital rules analysing both approaches in a single framework using the empirical findings of a small and highly volatile economy, such as Iceland. The conclusions, however, are of equal importance in a cross-country context. On the first level, the analysis is concerned with the CAD on a macroeconomic level, where it is shown that higher macroeconomic volatility should add to the minimum capital requirement