Procyclicality: Difference between revisions
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''Bank supervision - capital adequacy - leverage.'' | 1. ''Bank supervision - capital adequacy - leverage.'' | ||
The tendency of financial systems to amplify fluctuations in the economic cycle. | The tendency of financial systems to amplify fluctuations in the economic cycle. | ||
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:This points to the policy challenges regulators face. | :This points to the policy challenges regulators face. | ||
:They have to try and identify when pure cyclical fluctuations morph into something different: either a change in the trend itself or the start of a cumulative process." | :They have to try and identify when pure cyclical fluctuations morph into something different: either a change in the trend itself or the start of a cumulative process... | ||
:One major source of procyclicality is excessive risk taking. Bubbles develop because investors have an incentive to ignore the "tail risk" that the bubble may burst. | |||
:Because bubbles are mostly financed by credit, most of the risk is shifted to lenders. This asymmetry in incentives is extremely difficult to eliminate [in advance]. | |||
:Hence the need, for macroprudential supervisors, to monitor closely the financial system and preserve their possibility to intervene..." | |||
:''Jean-Pierre Landau, Deputy Governor of the Bank of France, BIS Review 94/2009.'' | :''Jean-Pierre Landau, Deputy Governor of the Bank of France, BIS Review 94/2009.'' | ||
2. ''Bank supervision - capital adequacy - leverage - risk management.'' | |||
The degree to which a particular financial institution is at risk from the effects of procyclical fluctuations, directly or indirectly. | |||
3. ''Risk - risk management.'' | |||
Similar effects in non-financial sectors of the economy, or the degree of risk to which a particular non-financial organisation is exposed to procyclical risks. | |||
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* [[Bank supervision]] | * [[Bank supervision]] | ||
* [[Basel III]] | * [[Basel III]] | ||
* [[Bubble]] | |||
* [[Buffer]] | * [[Buffer]] | ||
* [[Capital]] | * [[Capital]] | ||
* [[Capital adequacy]] | * [[Capital adequacy]] | ||
* [[Capital buffer]] | * [[Capital buffer]] | ||
* [[Conservative]] | |||
* [[Countercyclical]] | * [[Countercyclical]] | ||
* [[Countercyclical buffer]] | * [[Countercyclical buffer]] | ||
* [[Credit]] | |||
* [[Cumulative]] | * [[Cumulative]] | ||
* [[Cyclical]] | * [[Cyclical]] | ||
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* [[Herd behaviour]] | * [[Herd behaviour]] | ||
* [[Leverage]] | * [[Leverage]] | ||
* [[Macroprudential]] | |||
* [[Procyclical]] | * [[Procyclical]] | ||
* [[Procyclical risk]] | |||
* [[Prudential]] | * [[Prudential]] | ||
* [[Regulator]] | * [[Regulator]] | ||
* [[Resilience]] | |||
* [[Risk]] | |||
* [[Risk management]] | |||
* [[Supervision]] | * [[Supervision]] | ||
* [[Tail risk]] | |||
* [[Total Loss Absorbing Capacity]] (TLAC) | * [[Total Loss Absorbing Capacity]] (TLAC) | ||
* [[Trend]] | * [[Trend]] | ||
==Other resource== | |||
*[https://www.bis.org/review/r090805d.pdf Procyclicality - what it means and what could be done - Jean-Pierre Landau, Deputy Governor of the Bank of France, BIS Review 94/2009] | |||
[[Category:Accounting,_tax_and_regulation]] | [[Category:Accounting,_tax_and_regulation]] |
Latest revision as of 01:13, 22 November 2023
1. Bank supervision - capital adequacy - leverage.
The tendency of financial systems to amplify fluctuations in the economic cycle.
- Interaction and amplification
- "Herd behaviour has long been known to be an essential feature of financial markets.
- More subtly, individual reactions, by themselves rational, can, by the virtue of their mutual interaction, produce strong amplification effects.
- A broader definition of procyclicality would thus encompass three components, which cannot easily be distinguished in real life:
- (1) fluctuations around the trend
- (2) changes in the trend itself and
- (3) possible cumulative deviations from equilibrium value.
- This points to the policy challenges regulators face.
- They have to try and identify when pure cyclical fluctuations morph into something different: either a change in the trend itself or the start of a cumulative process...
- One major source of procyclicality is excessive risk taking. Bubbles develop because investors have an incentive to ignore the "tail risk" that the bubble may burst.
- Because bubbles are mostly financed by credit, most of the risk is shifted to lenders. This asymmetry in incentives is extremely difficult to eliminate [in advance].
- Hence the need, for macroprudential supervisors, to monitor closely the financial system and preserve their possibility to intervene..."
- Jean-Pierre Landau, Deputy Governor of the Bank of France, BIS Review 94/2009.
2. Bank supervision - capital adequacy - leverage - risk management.
The degree to which a particular financial institution is at risk from the effects of procyclical fluctuations, directly or indirectly.
3. Risk - risk management.
Similar effects in non-financial sectors of the economy, or the degree of risk to which a particular non-financial organisation is exposed to procyclical risks.
See also
- Bank
- Bank supervision
- Basel III
- Bubble
- Buffer
- Capital
- Capital adequacy
- Capital buffer
- Conservative
- Countercyclical
- Countercyclical buffer
- Credit
- Cumulative
- Cyclical
- Deviation
- Economy
- Equilibrium
- Herd behaviour
- Leverage
- Macroprudential
- Procyclical
- Procyclical risk
- Prudential
- Regulator
- Resilience
- Risk
- Risk management
- Supervision
- Tail risk
- Total Loss Absorbing Capacity (TLAC)
- Trend