Procyclicality of minimum regulatory capital requirements for credit riskThere is a large amount of literature available on the additional procyclicality of regulatory capital requirements in Pillar 1 of Basel II. In this section, we will briefly review this literature and see if any conclusions can be drawn from it, before proceeding to conclude and mitigate these procyclical effects. As expected, the majority of literature focuses primarily on the IRB approach, as this aspect of Basel II has attracted the most criticism from financial practitioners and academics. Much of this literature has found an extremely substantial increase in the procyclicality of minimum regulatory capital requirements arising from the IRB approach. Gordy and Howells found that under the IRB approach, the volatility of the capital requirement, relative to the average, ranges between 0.1 and 0.26 (Gordy and Howells, 2004). This follows another study by Kashyap and Stein, which shows that capital charges increased by 70-90% between 1998 and 2002 depending on the model used to calculate PDs (Goodhart and Taylor, 2004). The implications of these results are as follows: follows. The work of these scholars highlights the important point that there is greater volatility in capital requirements for higher quality credit (Goodhart and Taylor, 2004). Indeed, these credits face a steeper risk curve, because movements within the rating scale (from one rating to another) are much greater. Possible Solutions to Mitigate Procyclicality Now that we have reviewed the literature and empirical evidence on the problem of procyclicality arising from Basel II, we will see how these problems can be addressed. As already noted, regulatory capital requirements, in the middle of the book......, Basel: Basel Committee on Banking Supervision. Elizalde, A., 2007. From Basel I to Basel II, Madrid: CEMFI.FSF & BCBS, 2009. Reducing procyclicality arising from the bank capital framework, Basel: BCBS. Goodhart, C. & Taylor, A., 2004. Procyclicality and volatility in the financial system: The implementation of Basel II and IAS 39, London: London School of Economics. Gordy, M. & Howells, B., 2004. Procyclicality in Basel II: Can we treat the disease without killing the patient?, sl: Federal Reserve Board. Larson, J., 2011. The Basel Capital Accords, sl: University of Iowa Press. Lowe, P., 2002. Credit Risk Measurement and Procyclicality, Basel: Bank for International Settlements. Moody's Analytics, 2011. Introduction to Credit Risk Measures EDF credit of public companies TTC, sl: Moody's. Repullo, R. & Suarez, J., 2007. The procyclical effects of Basel II, Madrid: CEMFI.