Procyclicality: Difference between revisions
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* [[Risk]] | * [[Risk]] | ||
* [[Risk management]] | * [[Risk management]] | ||
* [[Robustness]] | |||
* [[Supervision]] | * [[Supervision]] | ||
* [[Tail risk]] | * [[Tail risk]] | ||
Revision as of 01:00, 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 macro 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
- Procyclical
- Procyclical risk
- Prudential
- Regulator
- Risk
- Risk management
- Robustness
- Supervision
- Tail risk
- Total Loss Absorbing Capacity (TLAC)
- Trend
