Modeling Basel Regulatory in DSGE with Emphasis on Adequacy Regulatory

In this paper Basel regulation is modeled in Dynamic Stochastic General Equilibrium (DSGE) framework. For this purpose, using data from 1981-2017 for Iran, capital adequacy as an importance regulation is modeled. Results show Basel regulation has procyclical effect. According to the results of the model and according to the realities of economy and banking system of Iran, in recession, lending and credit risk increase and repayment probability decrease. Despite these conditions, capital adequacy does not increase. This confirms that risks are less relevant in determining capital. If elasticity of repayment probability with respect to capital loan ratio is zero, Basel II is more procyclical than Basel I. If elasticity of repayment probability with respect to capital loan ratio is 0.5, Basel II is less procyclical than Basel I.