Sebastian Barnes, Eddie Casey, 17 June 2019

Expenditure rules are an attractive way of keeping government spending on a steady path consistent with sustainable growth, but they rely on an estimate of potential output growth. Using data on the European Commission's past forecasts of both potential growth rates and actual output growth rates for 15 member states for the period 2004–2018, this column shows that there is a real danger of faulty potential output estimates leading to procyclical policy.

Harry Huizinga, Luc Laeven, 29 May 2019

A high procyclicality of banks’ loan loss provisioning is undesirable from a financial stability perspective, as it implies that bank capitalisations are more negatively affected at the trough of the business cycle, exactly when capital market conditions for banks are at their weakest. This column finds that provisioning procyclicality in the euro area is about twice as high as in other countries. This has important implications for the supervision of euro area banks going forward.

David Murphy, Michalis Vasios, Nick Vause, 06 June 2014

Initial margin models are often procyclical, raising margin requirements at times of market stress, which can exacerbate that stress. This column proposes quantitative measures of procyclicality both over the cycle and over liquidity planning horizons. If market participants disclosed these procyclicality measures of their margin models, this could help counterparties to anticipate potential increases in margin requirements, and to prepare accordingly.

Rafael Repullo, Jesús Saurina, Carlos Trucharte, 24 September 2009

One widespread concern about Basel II’s risk-sensitive bank capital requirements is that they may amplify business cycle fluctuations. This column argues that the best way to correct this procyclicality is to use a business cycle multiplier of the Basel II capital requirements that is increasing in the rate of growth of the GDP. Under such a scheme, riskier banks would face higher capital requirements without regulation exacerbating credit bubbles and crunches.

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