Stress testing is the best option to counter Basel II cyclicality problem, say regulators

BASEL – Global banking regulators said stress testing of internal ratings based (IRB) methods of measuring bank credit risk is the best option in terms of tackling the possibility that the complex Basel II bank capital accord could reinforce economic cycles.

The regulators were replying to fears that the risk-based accord, which they plan to bring into force for major banks by late 2006 to help make the world’s banking system safer, would result in banks exacerbating economic cycles. This could happen because banks might be over-stingy with credit in recessions and over-generous in boom times, according to the dictates of the risk-sensitive Basel II rules on the level of protective capital needed by banks to absorb unexpected losses from credit