Letter to the Editor: Forbearance measures needed for Basel II

Wilson Ervin and I published an article in Risk last year on the danger that the Basel II proposed reforms of bank capital will lead to procyclicality, ie, pressure on banks to sell assets or raise capital at inopportune times, due to the risk sensitivity of Basel II capital requirements.

We remain very concerned that, unless some flexibility is built into Basel II, there will be no way for regulators to ‘forbear’ when necessary, ie, to flex capital requirements when, for example, banks can’t raise more capital and sales of assets might do further damage in the market.

Regulators agree that there is a problem, but there is unwillingness to entertain the idea of built-in flexibility. In fact, regulatory analysis of procyclicality we’ve seen plays down the problem, suggesting