This paper studies the pro-cyclicality of risk weights with respect to the business, credit and financial cycles using data for the Czech Republic. The empirical results indicate that risk weights behave pro-cyclically under the IRB approach and acyclically under the STA approach. The pro-cyclical behaviour of IRB risk weights for credit exposures is caused primarily by the procyclicality of risk weights for retail credit exposures, the strongest effects being in the highest and lowest quantiles of risk weights. The risk weights for retail exposures behave pro-cyclically not only with regard to the business cycle, but also with respect to the financial cycle and house price growth.
JEL codes: C22, E32, G21, G28
Keywords: Housing market, internal ratings-based approach, procyclicality, quantile regression, risk weight
Issued: October 2018
Download: CNB WP No. 12/2018 (pdf, 770 kB)