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PROCYCLICALITY IN THE BANKING INDUSTRY: CAUSES, CONSEQUENCES AND RESPONSE

 

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.

 

Keywords: Banking, procyclicality, demand and supply of loans, capital requirements, BasII and III

JEK Classification: C33, G21, G28

Acknowledgements: The authors would like to thank Heather Gibson, George Oikonomou, Athanasio Tagkalaki, Ioanni Tsikripi and participants in the International Workshop “Regulations, Capital Markets, and Financial Institutions: The Post Crisis Era” in 2011 for their helpful comments. The views expressed in this paper do not necessarily reflect those of the Bank of Greece.

 

 

Correspondence:

Panayiotis P. Athanasoglou

Bank of Greece

El. Venizelou, 21, 102 50

Athens, Greece

Tel.: +30-210-3202449

e-mail: pathanasoglou@bankofgreece.gr

 

 

 

 

 

 

 

 


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