Publication detail

Adverse Feedback Loop in the Bank-Based Financial Systems

Author(s): doc. PhDr. Adam Geršl Ph.D.,
doc. PhDr. Ing. Ing. Petr Jakubík Ph.D. Ph.D.,
Type: IES Working Papers
Year: 2010
Number: 14
ISSN / ISBN:
Published in: IES Working Papers 14/2010
Publishing place: Prague
Keywords: procyclicality; feedback loop; bank regulation; deleveraging
JEL codes: G21; E44; E47
Suggested Citation: Geršl, A., Jakubík, P. (2010). “Adverse Feedback Loop in the Bank-Based Financial Systems” IES Working Paper 14/2010. IES FSV. Charles University.
Grants: GACR 403/10/1235 (2010-2014) Institutional Responses to Financial Market Failures GAUK 2009/47509 Decomposition of securities' market prices into risk parameters IES Research Framework Institutional task (2005-2011) Integration of the Czech economy into European union and its development
Abstract: This paper examines procyclicality of the financial system. The introduction describes the natural and regulatory sources of procyclicality, focusing on the potential procyclical effect of the current Basel II regulatory framework for banks. It also mentions the regulatory tools for mitigating procyclical behaviour by financial institutions currently being discussed in international forums. Under certain conditions, procyclical behaviour of the banking sector can lead to an adverse feedback loop whereby banks, in response to an economic downswing, engage in deleveraging and reduce their lending to the economy in order to maintain the required capital adequacy ratio. This then further negatively affects economic output and impacts back on banks in the form of, for example, increased loan losses. In the main empirical section of the paper, this effect was simulated on the example of the Czech banking sector. The simulation results suggest that under certain assumptions the feedback loop may play an important role.
Downloadable: WP 2010_14_Gersl, Jakubik

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