Procyclicality of the financial system

Abstract

Financial market regulations are often said to exacerbate cyclical fluctuations. For example, accounting and capital adequacy regulations may promote lending in an upswing and reduce the availability of finance in a downswing. It has been suggested that financial market regulations need to be revamped in order to reduce such procyclicality. For example, dynamic loan loss provisions have been discussed. The measurement of financial assets at market value is a key concern in terms of procyclicality.