A vicious circle

Regulators are looking at how best to ensure capital adequacy rules are not pro-cyclical. The Basel Committee has proposed changes to its market risk rules, but further, counter-cyclical changes have been suggested. What is being considered and what are the ramifications of any change? By Joel Clark

Critics of Basel II have long argued the rules are inherently pro-cyclical. The risk-sensitive nature of the framework means capital requirements would fall in a boom, yet rise in a downturn - a feature some claimed would force banks, facing severe capital constraints, to cut back lending in any recession, further aggravating the slump.

The financial crisis has meant tackling this issue has taken on a sudden urgency. In March, the Basel Committee on Banking Supervision declared it intends to