Regulatory Solutions to Bank Loans Pro-Cyclicality. Is the Cure Worse than the Illness?
AbstractThe impact of the business cycle on banks’ internally generated cash flow is an important driver in the pro-cyclical dynamics of the traditional banking business and yet the issue has been understated in the discussion on counter-cyclical regulations. Considerable attention has been given to the need to lessen capital scarcity during the downturns and to the discrepancy between accounting rules and regulation standpoints. In contrast, the importance of incentives arising from this type of regulations has received little attention. We develop an exercise of a representative bank to illustrate the dynamic effects of some counter-cyclical regulatory schemes, with a special focus on the impact on cash flows. We show that while a counter-cyclical provisioning scheme changes the temporal impact of the cycle on accounting earnings, it may still stress cyclicality. Alternative counter-cyclical regulatory schemes such as time-varying capital and liquidity requirements are also assessed with a focus on the above mentioned impact on cash flows and other potential drawbacks associated with the interplay among accounting rules, signaling and incentives to "manage the balance sheet”.
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Bibliographic InfoPaper provided by Central Bank of Argentina, Economic Research Department in its series BCRA Working Paper Series with number 201154.
Length: 36 pages
Date of creation: Mar 2011
Date of revision:
banking system; bank loans; counter-cyclical regulation; procyclicality;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Larry D. Wall & Timothy W. Koch, 2000. "Bank loan-loss accounting: a review of theoretical and empirical evidence," Economic Review, Federal Reserve Bank of Atlanta, Federal Reserve Bank of Atlanta, issue Q2, pages 1-20.
- Cavallo, Michele & Majnoni, Giovanni, 2001. "Do Banks provision for bad loans in good times? empirical evidence and policy implications," Policy Research Working Paper Series, The World Bank 2619, The World Bank.
- Edgardo Demaestri & Gustavo Ferro, 2013. "Analysis of the Integration of Financial Regulation and Supervision to the Central Bank," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, Central Bank of Argentina, Economic Research Department, vol. 1(68), pages 75-106, June.
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