Abstract:

This paper basically examines implementation of Basel Accords in Pakistan and investigates to what extent; these accords have positive or negative impact on economy. Two types of capital, Tier 1 and Tier 2 are examined under Basel II for the first time for a developing country. Both have impact on capital management but their mechanisms are different. For this purpose, two models, capital buffer model and provisioning models are used for the estimation through GMM one step and two steps for the period of 2001-2012 for 47 Pakistani commercial banks. Results show that Basel II Capital accord is pro-cyclical. Sample is divided into two regimes. Tier 1 capital is positively related and Tier 2 is negatively related to loan loss provisions in the pre Basel regime while the results are reversed in the post Basel regime. Business cycle fluctuations are positively related to loan loss provisions in the pre Basel regime and negatively related in the post Basel regime providing the evidence that new capital regulation is pro-cyclical.

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