Chapter 2: Monetary aggregates and procyclicality of the financial system: an Asian perspective
Financial procyclicality is a feature commonly observed in most economies. However, driving factors could vary across advanced and emerging market countries, and closed versus open economies. A crucial task in mitigating procyclicality of credit growth, which is a key challenge in macro-prudential policy, is to monitor and identify the relevant stage of financial cycles. As we have seen from the recent credit booms in the period leading to the global financial crisis in 2007–08, excessive credit growth is mirrored on the liabilities side of a bank balance sheet by shifts in the composition of funding. Stable sources of funding available to the banking sector are, for instance, retail deposits of household savers. However, retail deposits grow slowly in line with the aggregate wealth of the household sector. In a credit boom when bank lending is growing very rapidly, the pool of retail deposits is not sufficient to fund the increase in bank credit, and other sources of funding must be tapped. Consequently, the state of the financial cycle is reflected in the composition of bank liabilities.
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