Report
Finance is cyclical: What can be done about it?
In a recession, all areas of finance become procyclical: Institutional investors and investment funds, faced with falling financial asset prices and the resulting capital losses, reduce their purchases of risky assets, which amplifies the fall in asset prices; Banks, faced with bankruptcies and capital losses, reduce their credit supply, which weakens household and corporate demand even further; Rating agencies downgrade borrowers’ ratings in recessions, which increases their borrowing costs and can even make it difficult for them to access financing (for example for borrowers that are downgraded from Investment Grade to High Yield). How can finance be made less procyclical? By making countercyclical adjustments to investors’ and banks’ prudential rules (regulatory capital ratios, etc.); By accepting lower rating floors for investors during recessions; By requiring central banks to also buy poor-quality bonds during recessions .
Provider
Natixis
Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.
Patrick Artus
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