Are Risk Weights of Banks in the Czech Republic Procyclical? Evidence from the Wavelet Analysis – forthcoming

Václav Brož, Lukáš Pfeifer, Dominika Kolcunová

We analyze the cyclicality of risk weights of banks in the Czech Republic from 2008 to 2016. We differentiate between risk weights under the internal ratings-based and those under the standardized approach, consider both the business cycle and the financial cycle, and employ wavelet coherence as a means of dynamic correlation analysis. Our results indicate that the risk weights of exposures under the internal ratings-based approach, including risk weights related to exposures secured by real estate collateral, are procyclical with respect to the financial cycle. We also show that the effect of changing asset quality on risk weights is present for the internal ratings-based approach, in line with our expectations based on regulatory standards. Our results can be employed for the purposes of decision-making on the activation of supervisory and macroprudential instruments, including the countercyclical capital buffer.

JEL codes: C14, E32, G21, G28, K23

Keywords: Financial cycle, financial stability, internal ratings-based approach, risk weight

Issued: December 2017

Download: CNB WP No. 15/2017 (pdf, 750 kB)