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Committee on the Global Financial System

CGFS Papers

No 34

The role of valuation and leverage in procyclicality

Report prepared by a joint Working Group of the Financial Stability Forum and the Committee on the Global Financial System This joint Working Group was chaired by Jean-Pierre Landau of the Bank of France April 2009

JEL Classification numbers: G15, G18, G21, G24, G28

Copies of publications are available from: Bank for International Settlements Press & Communications CH 4002 Basel, Switzerland E-mail: publications@bis.org Fax: +41 61 280 9100 and +41 61 280 8100 This publication is available on the BIS website (www.bis.org).

© Bank for International Settlements 2009. All rights reserved. Brief excerpts may be reproduced or translated provided the source is cited.

ISBN 92-9131-792-6 (print) ISBN 92-9197-792-6 (online)

Background

This report has been prepared by a joint Working Group of the Financial Stability Forum (FSF) and the Committee on the Global Financial System (CGFS). The Working Group was chaired by Jean-Pierre Landau of the Bank of France. The report is part of the effort of the FSF to examine forces that contribute to procyclicality in the financial system and to recommend policy options to mitigate them. Recommendations drawn from the policy options discussed in this report are presented in the FSF’s April 2009 report entitled Addressing procyclicality in the financial system. This Working Group report is also (www.fsforum.org/publications/r_0904h.pdf). available on the FSF website

CGFS – The role of valuation and leverage in procyclicality

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Contents

Executive summary ................................................................................................................ vii 1. 2. Introduction......................................................................................................................1 Leverage...