Financial Sector Pro-Cyclicality: Lessons from the Crisis

86 Pages Posted: 29 Sep 2009 Last revised: 21 May 2011

See all articles by Fabio Panetta

Fabio Panetta

Bank of Italy

Paolo Angelini

Bank of Italy

Ugo Albertazzi

ECB -DG Monetary Policy

Francesco Columba

Bank of Italy

Wanda Cornacchia

Bank of Italy

Antonio Di Cesare

Bank of Italy

Andrea Pilati

Bank of Italy

Carmelo Salleo

Bank of Italy

Giovanni Santini

Bank of Italy

Date Written: April 28, 2009

Abstract

We analyze the main forces affecting financial system pro-cyclicality (the fact that developments in the financial sector can amplify business cycle fluctuations). We first review some major structural developments in financial markets that may influence pro-cyclicality and that have been overlooked in earlier analyses. We then examine three issues that are center stage in the current debate: capital regulation, accounting standards and managers’ incentives. After reviewing the institutional set-up and the key mechanisms at work, we critically examine a series of proposals designed to mitigate pro-cyclicality.

Keywords: pro-cyclicality, financial accelerator, capital requirements, leverage, accounting standards, incentives

JEL Classification: E5, G1, G2, G3, M4

Suggested Citation

Panetta, Fabio and Angelini, Paolo and Albertazzi, Ugo and Columba, Francesco and Cornacchia, Wanda and Di Cesare, Antonio and Pilati, Andrea and Salleo, Carmelo and Santini, Giovanni, Financial Sector Pro-Cyclicality: Lessons from the Crisis (April 28, 2009). Bank of Italy Occasional Paper No. 44. Available at SSRN: https://ssrn.com/abstract=1479499 or http://dx.doi.org/10.2139/ssrn.1479499

Fabio Panetta (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy
+39 06 4792 4143 (Phone)
+39 06 4792 3723 (Fax)

Paolo Angelini

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Ugo Albertazzi

ECB -DG Monetary Policy ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Francesco Columba

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy
+39-06-47922131 (Phone)
+39-09-47923611 (Fax)

Wanda Cornacchia

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Antonio Di Cesare

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Andrea Pilati

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Carmelo Salleo

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Giovanni Santini

Bank of Italy ( email )

Via Piacenza, 6
00184 Rome, I - 00184
Italy
+39-06-4792-5783 (Phone)

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