Pro-cyclicality in the new Basel Accord

The proposed new capital Accord (Basel, 2001) is designed to be more sensitive to risk in general and to credit risk in particular. Lower-rated assets will cost more in terms of capital in both the standardised and, especially, the internal ratings-based (IRB) approach. Greater risk sensitivity is seen as desirable because it should promote risk-adjusted business decisions and improve capital allocation within banks as well as improving capital allocation across banks. The new rules will require

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