regulation. The main concern is that the new risk-sensitive bank capital regulation (Basel II) may amplify business cycle … that the latter is better in terms of simplicity, transparency, and consistency with banks' risk pricing and risk …

We empirically assess the sensitivity of Basel risk weights to bank portfolio risk and the business cycle. With our … econometric model, we distinguish between cross-sectional risk sensitivity and longitudinal risk sensitivity (cyclicality) of the … regulatory standard. Employing a comprehensive data set covering 200 large banks from 28 countries, we find that actual risk …