Comments on “Procyclicality and Volatility in the Financial System”

Abstract

As Ashley Taylor and Charles Goodhart’s most insightful chapter demonstrates, there are concerns both in academia and in the banking sector regarding the potential costs of greater procyclicality that could come together with Basel II and IAS 39. The question is to what extent these concerns are really well founded, and I aim to address this issue here. I will start with a discussion of cyclicality, both in general and in the financial system in particular. I will next go on to explain what the main likely consequences of Basel II are regarding the volatility of the financial cycle and procyclicality. I will then turn to discussing how excessive procyclicality can be fixed — if it were eventually to arise — and will conclude with some remarks on the likely impact of IAS 39 on procyclicality and on how restrictive the new accounting standards are concerning the implementation of some of the best remedies for the procyclicality problem, should it finally arise.

The views expressed here are purely personal.