Global | Procyclical financial regulation: what can be done?

Summary

The Covid crisis has shown that the reform of international financial regulation in recent years has not corrected the procyclicality problem. On the contrary, this problem has worsened as a result of the new accounting standards. The article explores the reasons for this and possible policy measures to address the problem.

Key points

• Key points:
• Financial regulation remains procyclical.
• This is the result of policies that tend to be too lenient in the boom and markets tend to be too harsh in the bust.
• What we need is tighter policies in the good times and more forward-looking markets in the bad times.
• A rebalancing of the capital buffers, increasing the countercyclical buffer and reducing structural ones, would also allow for a better reaction to negative shocks.
• The relation between countercyclical capital buffers and dynamic provisions under expected loss accounting is an area that deserves further research.

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