The tendency of rules or behaviour to amplify the economic cycle, for example by tightening credit in a downturn. Capital and margin rules can have this effect.
Where you will meet it
Procyclicality comes up in 17 learning outcome notes across the FRM syllabus.
A few of them:
Central Clearing FRM Part I · Financial markets and products
“Margin also rises when volatility rises, which is procyclical.”
External and Internal Credit Ratings FRM Part I · Valuation and risk models
“Point-in-time systems make capital requirements more procyclical.”
Credit Scoring and Rating FRM Part II · Credit risk measurement and management
“PIT systems make capital and provisions more procyclical, rising in recessions, which is the usual exam point.”
Advances in Artificial Intelligence: Implications for Capital Markets Activities FRM Part II · Current issues in financial markets
“That produces herding, procyclical selling and amplified price moves in stress.”
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