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Bank Regulation and Macroeconomic Fluctuations

  • Charles Goodhart
  • Boris Hofmann
  • Miguel Segoviano

Over the last two decades, macroeconomic cycles were frequently associated with boom--bust cycles in bank lending and asset prices, often followed by financial instability. In this paper we argue that (i) the new pattern of macroeconomic cycles is partly the result of banking-sector liberalization since the early/mid-1970s, which has increased the procyclicality of the financial system; (ii) the regulation of bank capital in the form of capital adequacy requirements is itself inherently procyclical and may therefore amplify business-cycle fluctuations; (iii) the new Basel II Accord may considerably accentuate the procyclicality of the regulatory system. Copyright 2004, Oxford University Press.

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Article provided by Oxford University Press in its journal Oxford Review of Economic Policy.

Volume (Year): 20 (2004)
Issue (Month): 4 (Winter)
Pages: 591-615

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Handle: RePEc:oup:oxford:v:20:y:2004:i:4:p:591-615
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  1. Burkhard Drees & Ceyla Pazarbasioglu, 1995. "The Nordic Banking Crises: Pitfalls in Financial Liberalization?," IMF Working Papers 95/61, International Monetary Fund.
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  12. Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, vol. 48(4), pages 827-849, August.
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