Basel II introduces an additional source of procyclicality into the banking sector, a new paper from Norges Bank finds.

The research reveals that higher capital requirements and falling capital adequacy ratios in recession induce banks to tighten their credit standards and can amplify the economic downturn. "This concern has been intensified by the ongoing financial crisis," the paper notes.

The paper uses the stress-testing framework of the central bank to analyse the cyclicality of capital