Adverse Feedback Loop in the Bank-Based Financial Systems
AbstractThis paper examines procyclicality of the financial system. The introduction describes the natural and regulatory sources of procyclicality, focusing on the potential procyclical effect of the current Basel II regulatory framework for banks. It also mentions the regulatory tools for mitigating procyclical behaviour by financial institutions currently being discussed in international forums. Under certain conditions, procyclical behaviour of the banking sector can lead to an adverse feedback loop whereby banks, in response to an economic downswing, engage in deleveraging and reduce their lending to the economy in order to maintain the required capital adequacy ratio. This then further negatively affects economic output and impacts back on banks in the form of, for example, increased loan losses. In the main empirical section of the paper, this effect was simulated on the example of the Czech banking sector. The simulation results suggest that under certain assumptions the feedback loop may play an important role.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2010/14.
Date of creation: Jul 2010
Date of revision: Jul 2010
procyclicality; feedback loop; bank regulation; deleveragin;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-24 (All new papers)
- NEP-BAN-2010-07-24 (Banking)
- NEP-CMP-2010-07-24 (Computational Economics)
- NEP-REG-2010-07-24 (Regulation)
- NEP-RMG-2010-07-24 (Risk Management)
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.:
- Eva Ryšavá & Elisa Galeotti, 2009. "Determinants of FDI in Czech Manufacturing Industries between 2000-2006," Working Papers IES 2009/17, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Apr 2009.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lenka Herrmannova).
If references are entirely missing, you can add them using this form.