Procyclicality of the Financial System and Simulation of the Feedback Effect
In: CNB Financial Stability Report 2009/2010
This article 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 a feedback effect whereby banks, in response to an economic downswing, 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, further growth in non-performing loans. In the main empirical section of the article, this effect was simulated on the example of the Czech banking sector using the current stress-testing system and a single adverse scenario. The simulation results suggest that under certain assumptions the feedback effect may play an important role.
|This chapter was published in: Adam Gersl & Petr Jakubik CNB Financial Stability Report 2009/2010, , chapter Thematic Article 3, pages 110-119, 2010.|
|This item is provided by Czech National Bank, Research Department in its series Occasional Publications - Chapters in Edited Volumes with number fsr0910/3.|
|Contact details of provider:|| Postal: Na Prikope 28, 115 03 Prague 1|
Phone: 00420 2 2442 1111
Fax: 00420 2 2421 8522
Web page: http://www.cnb.cz/en/research/research_intro/
More information through EDIRC
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.:
- Eickmeier, Sandra & Hofmann, Boris & Worms, Andreas, 2006.
"Macroeconomic fluctuations and bank lending: evidence for Germany and the euro area,"
Discussion Paper Series 1: Economic Studies
2006,34, Deutsche Bundesbank, Research Centre.
- Sandra Eickmeier & Boris Hofmann & Andreas Worms, 2009. "Macroeconomic Fluctuations and Bank Lending: Evidence for Germany and the Euro Area," German Economic Review, Verein für Socialpolitik, vol. 10, pages 193-223, 05.
- Petr Jakubik & Christian Schmieder, 2008. "Stress Testing Credit Risk: Is the Czech Republic Different from Germany?," Working Papers 2008/9, Czech National Bank, Research Department.
- Jodi G. Scarlata & Juan Sole & Alicia Novoa, 2009. "Procyclicality and Fair Value Accounting," IMF Working Papers 09/39, International Monetary Fund.
- Jan Frait & Zlatuse Komarkova, 2009. "Instruments for Curbing Fluctuations in Lending over the Business Cycle," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2008/2009, chapter 0, pages 72-81 Czech National Bank, Research Department.
- Mario Quagliariello, 2007. "Banks' riskiness over the business cycle: a panel analysis on Italian intermediaries," Applied Financial Economics, Taylor & Francis Journals, vol. 17(2), pages 119-138.
- Calza, Alessandro & Gartner, Christine & Sousa, João, 2001.
"Modelling the demand for loans to the private sector in the euro area,"
Working Paper Series
0055, European Central Bank.
- A. Calza & C. Gartner & J. Sousa, 2003. "Modelling the demand for loans to the private sector in the euro area," Applied Economics, Taylor & Francis Journals, vol. 35(1), pages 107-117.
- David Aikman & Piergiorgio Alessandri & Bruno Eklund & Prasanna Gai & Sujit Kapadia & Elizabeth Martin & Nada Mora & Gabriel Sterne & Matthew Willison, 2009.
"Funding Liquidity Risk in a Quantitative Model of Systemic Stability,"
Working Papers Central Bank of Chile
555, Central Bank of Chile.
- David Aikman & Piergiorgio Alessandri & Bruno Eklund & Prasanna Gai & Sujit Kapadia & Elizabeth Martin & Nada Mora & Gabriel Sterne & Matthew Willison, 2011. "Funding Liquidity Risk in a Quantitative Model of Systemic Stability," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.), Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 12, pages 371-410 Central Bank of Chile.
- Aikman, David & Alessandri, Piergiorgio & Eklund, Bruno & Gai, Prasanna & Kapadia, Sujit & Martin, Elizabeth & Mora, Nada & Sterne, Gabriel & Willison, Matthew, 2009. "Funding liquidity risk in a quantitative model of systemic stability," Bank of England working papers 372, Bank of England.
- Siem Jan Koopman & Roman Kraeussl & Andre Lucas & Andre Monteiro, 2006.
"Credit Cycles and Macro Fundamentals,"
Tinbergen Institute Discussion Papers
06-023/2, Tinbergen Institute.
- Driscoll, John C., 2004.
"Does bank lending affect output? Evidence from the U.S. states,"
Journal of Monetary Economics,
Elsevier, vol. 51(3), pages 451-471, April.
- John C. Driscoll, 2003. "Does bank lending affect output? evidence from the U.S. states," Finance and Economics Discussion Series 2003-31, Board of Governors of the Federal Reserve System (U.S.).
- Martin Cihak & Petya Koeva Brooks, 2009. "From Subprime Loans to Subprime Growth? Evidence for the Euro Area," IMF Working Papers 09/69, International Monetary Fund.
When requesting a correction, please mention this item's handle: RePEc:cnb:ocpubc:fsr0910/3. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jan Babecky)
If references are entirely missing, you can add them using this form.