ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Are Basel Capital Standards Pro-cyclical?

The debate on bank capital regulation has in recent years devoted specific attention to the role that bank loan loss provisions play as a part of the overall minimum capital regulatory framework. The new Capital Accord is also attempting to address provisioning practices within a broad capital regulatory framework. This paper contributes to the debate by exploring the available evidence about bank loan loss provisioning in the Indian context. Using data on state-owned banks for the period 1997-2002, we find that banks tend to delay provisioning for bad loans until too late, possibly magnifying the impact of the economic cycles on their income and capital.

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