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Procyclicality in the banking industry: causes, consequences and response

Author

Listed:
  • Panayiotis P. Athanasoglou

    () (Bank of Greece)

  • Ioannis Daniilidis

    () (Bank of Greece)

Abstract

Procyclicality is an inherent feature of the real and especially the financial sector of an economy, which has been highlighted by the recent crisis. Due to procyclicality, banks are transformed from mitigation mechanisms to amplifiers of changes in economic activity potentially affecting financial stability. The causes of procyclicality can be attributed to market imperfections and deviations from the efficient market hypothesis, while other factors -including Basel II and accounting standards- may have exacerbated it. To attenuate procyclicality, a number of suggestions have been made in the form of rules and discretion and are presented according to the factors they aim to alleviate. Some of the suggestions have been adopted under the Basel III framework, including the countercyclical capital buffer. Although these Basel III proposals seem able to address the procyclicality issue, they will lead to higher minimum capital adequacy ratios, which are expected to increase lending costs and the provision of loans by banks, and reduce economic activity. However, the cost of the new proposals is expected to be lower than the estimated cost of financial crisis.

Suggested Citation

  • Panayiotis P. Athanasoglou & Ioannis Daniilidis, 2011. "Procyclicality in the banking industry: causes, consequences and response," Working Papers 139, Bank of Greece.
  • Handle: RePEc:bog:wpaper:139
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    References listed on IDEAS

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    Cited by:

    1. Malgorzata Olszak, 2015. "The phenomenon of excessive procyclicality of the financial sector from the perspective of macroprudential policy – sources, methods of reduction and their basic limitations (Zjawisko nadmiernej procy," Problemy Zarzadzania, University of Warsaw, Faculty of Management, vol. 13(55), pages 72-96.
    2. Athanasoglou, Panayiotis P. & Daniilidis, Ioannis & Delis, Manthos D., 2014. "Bank procyclicality and output: Issues and policies," Journal of Economics and Business, Elsevier, pages 58-83.
    3. Kazeem O. Salaam, 2015. "Procyclicality Effects on Bank Lending Decisions: A Case Study of the British Banking Sector," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 5(2), pages 185-194, April.

    More about this item

    Keywords

    Banking; procyclicality; demand and supply of loans; capital requirements; BasII and III;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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