Procyclicality also refers to pro-cyclicality

The fact that bank lending tends to follow the same behavioral pattern as the real economy, i.e. strong growth during an economic upswing and minimal or even declining growth during a downturn. – Procyclical phenomena in the financial sector are unavoidable because confident expectations determine the actions of those involved (investors, institutes, banks) at times of economic upswing. However, it is the task of economic policy to develop suitable measures to dampen procyclicality. – The phenomenon that, due to the fair value valuation prescribed by IFRS, banks are forced to report their securities, which have now risen sharply in price, at market value when the stock market is bullish. – However, if prices collapse sharply – due to special circumstances such as the subprime crisis or, more generally, during the downturn phase of the economic cycle – corresponding losses have to be reported. – These loss reports cause market participants to sell their securities – as they believe: in time – which – reinforces the bear market on the financial market. – Allowing institutions to use the mark-to-model approach to value assets in such cases raises many questions. For example, in the wake of the subprime crisis, certain securitized securities were definitely and forever rendered completely worthless, consequently to be classified as nonvaleurs. It would be contrary to a credible presentation if banks recognized these securities on their balance sheets at any value greater than zero. – The German legislator therefore provided a way out of this dilemma in the German Accounting Law Modernization Act (BilMoG), which came into force on January 1, 2010. According to this law, it is permitted to allocate a certain portion of the fair value gain from financial instruments to a reserve. In this way, a countercyclical buffer can be created for downturns. – See Absence capitalism, contagion effects, audit, Basel-III, assessability, valuation, bubble, speculative, representation, credible, inventory value, insolvency cases, combination effect, mark-to-model approach, market value, rating agency, loss, occurred, asset, incorporated, time value, cyclicality. – Cf. ECB Monthly Bulletin, January 2005, pp. 59 et seq. (parallelism loan-growth; overview).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
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