What goes up too much must come down too much. The best countercyclical policy there is, is the elimination of the pro-cyclical ones.
“What goes up must come down, spinning wheel got to go 'round” David Clayton Thomas
Governor Lael Brainard on December 07, 2018, in “Assessing Financial Stability over the Cycle” a speech delivered at the Peterson Institute for International Economics, Washington, D.C., said:
“In an economic downturn, widespread downgrades of these low-rated investment-grade bonds to speculative-grade ratings could induce some investors to sell them rapidly--for instance, because lower-rated bonds have higher regulatory capital requirements or because bond funds have limits on the share of non-investment-grade bonds they hold.”
And Brainard then proceeds to extensively describe the advantages of countercyclical capital requirements (CCyB) for building additional resilience in the financial system.
YES...BUT, the other side of the mirror is: In an economic upturn, higher credit ratings of bonds could induce some investors to buy them rapidly--for instance, because higher-rated bonds have lower regulatory capital requirements, or because bond funds have lesser or no limits on investment-grade bonds they hold.
So if that is not procyclical what is?
Therefore, before thinking of using countercyclical capital requirements, which by themselves might be introducing distorting signals, which might make the use of these at the right moment when they are really needed harder, let’s get rid, altogether, of the risk weighted capital requirements for banks. Those, which, by the way, even when the economic cycles are correctly identified, still distort the allocation of bank credit to the real economy.
And since credit ratings were mentioned, in April 2003, at the World Bank I opined:
"Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as credit rating agencies. This will introduce systemic risks in the market"
Here is my 2004 letter to the Financial Times, FT, "Towards a counter cyclical Basel?" It was not published
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