The myths and truths about Basel II cyclicality

Basel II has been widely criticised for increasing the cyclicality of the financial system by allowing banks to hold less capital in good times and requiring higher capital levels in times of crisis. But do the facts bear this out? Francesco Cannata, Simone Casellina and Mario Quagliariello present their analysis of the Italian banking sector

The Basel Committee on Banking Supervision issued the final version of Basel III in December 2010, designed to address the regulatory shortcomings that emerged during the financial crisis. The new package – part of the comprehensive road map outlined by the Financial Stability Board and endorsed by the Group of 20 leaders – is meant to improve the banking sector’s ability to absorb shocks and reduce possible spill-overs to the real economy. The rules on bank capital are a key component of the