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Financial sector pro-cyclicality: lessons from the crisis

Author

Listed:
  • Fabio Panetta

    () (Bank of Italy)

  • Paolo Angelini

    () (Bank of Italy)

  • Ugo Albertazzi

    () (Bank of Italy)

  • Francesco Columba

    () (Bank of Italy)

  • Wanda Cornacchia

    () (Bank of Italy)

  • Antonio Di Cesare

    () (Bank of Italy)

  • Andrea Pilati

    () (Bank of Italy)

  • Carmelo Salleo

    () (Bank of Italy)

  • Giovanni Santini

    () (Bank of Italy)

Abstract

We analyze the main forces affecting financial system pro-cyclicality (the fact that developments in the financial sector can amplify business cycle fluctuations). We first review some major structural developments in financial markets that may influence pro-cyclicality and that have been overlooked in earlier analyses. We then examine three issues that are center stage in the current debate: capital regulation, accounting standards and managers� incentives. After reviewing the institutional set-up and the key mechanisms at work, we critically examine a series of proposals designed to mitigate pro-cyclicality.

Suggested Citation

  • Fabio Panetta & Paolo Angelini & Ugo Albertazzi & Francesco Columba & Wanda Cornacchia & Antonio Di Cesare & Andrea Pilati & Carmelo Salleo & Giovanni Santini, 2009. "Financial sector pro-cyclicality: lessons from the crisis," Questioni di Economia e Finanza (Occasional Papers) 44, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:opques:qef_44_09
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    File URL: http://www.bancaditalia.it/pubblicazioni/qef/2009-0044/QEF_44.pdf
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    More about this item

    Keywords

    pro-cyclicality; financial accelerator; capital requirements; leverage; accounting standards; incentives;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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