Regulatory Solutions to Bank Loans Pro-Cyclicality. Is the Cure Worse than the Illness?
The 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”.
|Date of creation:||Mar 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (54-11) 4348-3582
Fax: (54-11) 4000-1257
Web page: http://www.bcra.gov.ar
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.:
- Cavallo, Michele & Majnoni, Giovanni, 2001. "Do Banks provision for bad loans in good times? empirical evidence and policy implications," Policy Research Working Paper Series 2619, The World Bank.
- 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, issue Q2, pages 1-20.
When requesting a correction, please mention this item's handle: RePEc:bcr:wpaper:201154. 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: (Federico Grillo)
If references are entirely missing, you can add them using this form.