TITLE:
Bank Characteristics and Procyclicality: A Theoretical Approach
AUTHORS:
Marie-Sophie Gauvin
KEYWORDS:
Banking Sector, Monetary Policy Transmission, Equities, Liquidity
JOURNAL NAME:
Journal of Financial Risk Management,
Vol.3 No.3,
August
29,
2014
ABSTRACT: The 2007-2008 crisis highlighted
liquidity management troubles. We witness a real estate asset price boom during
the pre-crisis period and a difficulty for banks to raise funding afterwards. Consequently,
bank choices in response to the conduct of the monetary policy along the cycle can
be studied. Despite usual financial accelerator, the excessive (lack of) confidence
of banks in the upward (down) phase explains procyclical balance sheet movements.
Moreover, the monetary policy effects on bank behaviors vary according to their
initial specifications. From a theoretical point of view, this paper examines the
response of the banking sector to monetary authorities impulses, in function of
their initial characteristics. So, the paper highlights a theoretical model, based
on accounting identities, in which banks are distinguished in different categories
according to their level of capitalization and liquidity. The principal result is
that the less capitalized and liquid banks have more procyclical behaviors.