Financial Sector Pro-Cyclicality: Lessons from the Crisis

Panetta, Fabio; Angelini, Paolo; Albertazzi, Ugo; Columba, Francesco; Cornacchia, Wanda; Cesare, Antonio Di; Pilati, Andrea; Salleo, Carmelo; Santini, Giovanni

doi:10.2139/ssrn.1479499

Cited by 75 publications

(55 citation statements)

References 193 publications

(171 reference statements)

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“…58 Large European banks in 2007 had leverage ratios between 20 in the UK and 35 in Switzerland (see Panetta et al (2009) risk of a big crash. The first one consists in turning to a contractionnary monetary policy-at the cost of running the risk of falling into the liquidity trap (i.e., of shifting from scenario (iib) to scenario (i)).…”

Section: Some Concluding Commentsmentioning

confidence: 99%

Debt-deflation versus the liquidity trap: the dilemma of nonconventional monetary policy

Giraud

Pottier

2015

Econ Theory

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This paper examines quantity-targeting monetary policy in a two-period economy with fiat money, endogenously incomplete markets of financial securities, durable goods and production. Short positions in financial assets and long-term loans are backed by collateral, the value of which depends on monetary policy. The decision to default is endogenous and depends on the relative value of the collateral to the loan. We show that Collateral Monetary Equilibria exist and prove a refinement of the Quantity Theory of Money that turns out to be compatible with the long-run non-neutrality of money. Moreover, only three scenarios are compatible with the equilibrium condition: 1) either the economy enters a liquidity trap in the first period; 2) or a credible expansionary monetary policy accompanies the orderly functioning of markets at the cost of running an inflationary risk; 3) else the money injected by the Central Bank increases the leverage of indebted investors, fueling a financial bubble whose bursting leads to debt-deflation in the next period with a non-zero probability. This dilemma of monetary policy highlights the default channel affecting trades and production, and provides a rigorous foundation to Fisher's debt deflation theory as being distinct from Keynes' liquidity trap.

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Section: Some Concluding Commentsmentioning

confidence: 99%

Debt-deflation versus the liquidity trap: the dilemma of nonconventional monetary policy

Giraud

Pottier

2015

Econ Theory

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“…Similarly, the repeal of the sixdecade old Glass-Steagall Act in 1999 allowed American banks to conduct almost any financial activity (Barth el al., 2000). A brief survey of the other main drivers of development in the banking sector can be found in Panetta et al (2009a).…”

Section: The Samplementioning

confidence: 99%

The Rise and Fall of Universal Banking: Ups and Downs of a Sample of Large and Complex Financial Institutions Since the Late ‘90s

Masciantonio

Tiseno

2012

SSRN Journal

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aWe document the development of the major international banks since the late 1990s, analysing balance-sheet data for 27 large and complex financial institutions. We argue that balance-sheet expansion and business line diversification paved the way for the rise of the universal banking model. This model, apparently sound and efficient in the run-up to the crisis, revealed all its shortcomings when the crisis erupted. European banks displayed greater fragilities in their business models. The changed financial and regulatory landscape that followed has challenged this model further. Many proposed remedies to the global financial crisis appear to push for a return to a narrower model for banking activity.JEL classification: G21, G01

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“…The following factors can explain why banks tend to underestimate credit risk during expansions (Bouvatier and Lepetit, 2008;Panetta et al, 2009):  Risks are underestimated during expansions and overestimated during recessions if provisioning is based on a backward looking rule, for instance, if provisions are built when the risk materialises. There are only few problem loans in good times, but their share increases dramatically in bad times when the riskiness of loans granted at the peak of the cycle (on the basis of lax lending standards) becomes apparent.…”

Section: Pro-cyclicality Of Loan Loss Provisioning and Fundingmentioning

confidence: 99%

The Nature of Financial and Real Business Cycles

Égert

Sutherland

2012

OECD Economics Department Working Papers

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JT03314065This paper takes a fresh look at the nature of financial and real business cycles in OECD countries using annual data series and shorter quarterly and monthly economic indicators. It first analyses the main characteristics of the cycle, including the length, amplitude, asymmetry and changes of these parameters during expansions and contractions. It then studies the degree of economic and financial cycle synchronisation between OECD countries but also of economic and financial variables within a given country, and gauges the extent to which cycle synchronisation changed over time. Finally, the paper provides some new evidence on the drivers of the great moderation and analyses the banking sector's pro-cyclicality by using aggregate and bank-level data. The main findings show that the amplitude of the real business cycle was becoming smaller during the great moderation, but asset price cycles were becoming more volatile. In part this was linked to developments in the banking sector which tended to accentuate pro-cyclical behaviour. JEL classification codes: E32; E44Keywords: real business cycles; financial cycles, great moderation, banking system, financial markets ******* Cycles économiques et financiers: la grande modération et la pro-cyclicalité du secteur bancaireCe papier analyse la nature des cycles économiques et financiers dans les pays de l'OCDE en utilisant des séries annuelles, trimestrielles et mensuelles. Il analyse d'abord les principales caractéristiques du cycle, y compris la durée, l'amplitude, l'asymétrie et les changements de ces paramètres au cours des expansions et contractions. Il étudie ensuite le degré de synchronisation des cycles économiques et financiers entre les pays de l'OCDE, mais aussi des variables économiques et financières dans un pays donné, et évalue dans quelle mesure la synchronisation des cycles a changé au fil du temps. Enfin, le papier fournit quelques éléments nouveaux sur les facteurs de la grande modération et étudie la pro-cyclicité du secteur bancaire en utilisant des données agrégées et des banques individuelles. Les principaux résultats montrent que l'amplitude du cycle réel diminuait durant la grande modération, mais les cycles des prix des actifs ont été de plus en plus volatiles. Cela était en partie liée à l'évolution du secteur bancaire qui avait tendance à accentuer le comportement pro-cyclique.

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Financial Sector Pro-Cyclicality: Lessons from the Crisis

Cited by 75 publications

References 193 publications

Debt-deflation versus the liquidity trap: the dilemma of nonconventional monetary policy

Debt-deflation versus the liquidity trap: the dilemma of nonconventional monetary policy

The Rise and Fall of Universal Banking: Ups and Downs of a Sample of Large and Complex Financial Institutions Since the Late ‘90s

The Nature of Financial and Real Business Cycles

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