Interest rate swap and Procyclical: Difference between pages

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(IRS). A longer-term interest rate derivative.
1.
An IRS is similar in its effect to a Forward Rate Agreement (FRA).
An IRS - like an FRA - is a contract for differences based on an agreed market interest rate.  


But the IRS usually has multiple future interest calculation and settlement dates, and is used by a corporate to hedge or transform longer term interest rate exposures.
In [[business cycle]] theory and finance, any economic quantity that is positively correlated with the overall state of the economy.  


For example, an interest rate swap might be used to transform a longer term floating rate borrowing into a synthetic fixed rate borrowing.
Any quantity that tends to increase when the overall economy is growing.


(Whereas an FRA is for the shorter term and for a single settlement receipt or payment.)


Other forms of capital market swap have been developed for the exchange of many other different types of cash flows and are used widely to hedge or transform a wide variety of related underlying exposures.
2.
 
The additional amplification effects resulting from the structure of the financial system.
 
The performance of banks tends to be procyclical. They thrive when the economy is strong, and suffer disproportionately when the general economy is weak.
 
This is a problem, because it can amplify financial instability.
 
Basel III sought to address the problem of the procyclicality of the largest banks' capital, by requiring them to hold countercyclical capital buffers.
 
 
The opposite of procyclical is ''countercyclical''.
 


== See also ==
== See also ==
* [[Accreting swap]]
* [[Bank]]
* [[Amortising swap]]
* [[Basel III]]
* [[Cross-currency interest rate swap]]
* [[Buffer]]
* [[Forward rate agreement]]
* [[Capital]]
* [[Forward start swap]]
* [[Capital buffer]]
* [[Notional amount]]
* [[Countercyclical]]
* [[Swap]]
* [[Countercyclical buffer]]
* [[Swap rate]]
* [[Cyclical]]
* [[Economy]]
* [[Procyclicality]]
* [[Prudential]]
* [[Supervision]]
* [[Total Loss Absorbing Capacity]]


[[Category:Manage_risks]]
[[Category:The_business_context]]

Latest revision as of 08:48, 1 December 2023

1.

In business cycle theory and finance, any economic quantity that is positively correlated with the overall state of the economy.

Any quantity that tends to increase when the overall economy is growing.


2.

The additional amplification effects resulting from the structure of the financial system.

The performance of banks tends to be procyclical. They thrive when the economy is strong, and suffer disproportionately when the general economy is weak.

This is a problem, because it can amplify financial instability.

Basel III sought to address the problem of the procyclicality of the largest banks' capital, by requiring them to hold countercyclical capital buffers.


The opposite of procyclical is countercyclical.


See also