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Policies To Mitigate Procyclicality, John Kiff, Jochen Andritzky, Laura Kodres, Jodi Scarlata, Andrea Maechler, Pamela Madrid, Aditya Narain, Noel Sacasa

John Kiff

The present crisis has focused attention on how procyclicality in the financial system can have outsized effects. This paper examines the reasons for this, specifically focusing on regulations or market practices that can accentuate economic cycles. In this light, the paper thus discusses the role of private sector risk management practices (including liquidity risk management), compensation practices, capital adequacy requirements and provisioning rules, deposit insurance regimes, and monetary policy actions. While recognizing various practical limitations, new policy responses are identified that could help to mitigate procyclicality.