BASEL - The Basel Committee on Banking Supervision's Committee on the Global Financial System has published a report entitled 'The role of valuation and leverage in procyclicality'.
The report explores the link between leverage and valuation in the light of the recent market stress. It highlights that market practices related to market-sensitive valuation techniques have contributed to an increase in procyclicality of leverage in the financial system.
It considers several market practices, such as strongly procyclical haircuts on financing transactions and initial margins on OTC derivatives, that add liquidity to the market in a boom and drain it in times of stress, and sets out a number of policy options that could be considered to mitigate these procyclical mechanisms.
Click here for a copy of the report.