Third, in order to address the “excessive” procyclicality of the financial systems, we need to address the mechanisms that intensify fluctuations. For example, capital regulations and provisioning rules as developed by the Basel Committee of Banking Supervision need to restrain excessive risk-taking in upturns and discourage excessive conservatism when credit to firms and households is most needed.
What is the role of various authorities in this context? As we have seen, central banks were the very first among the authorities to react when in August 2007 the threat to liquidity in the financial system emerged. The resolute action of central banks constituted a “first line of defence” against the systemic liquidity threat.