Although cyclical moves should be clearly distinguished from volatility, the latter may in some circumstances exceed what can be considered optimal, making the price determination mechanism less efficient and thus contributing to misalignments.  •  Moreover, as demonstrated by a number of financial crises during the last two decades, contagion among countries and across financial markets has been frequent. As a result, investors have faced asset price fluctuations that might be more synchronised than before. •  Lastly, the connections between credit, asset price and business cycles have tended to amplify cyclical swings. Credit, in particular, has played an increasing role in asset price fluctuations. Initially observed during the “speculative bubbles” of the 1980s and early 1990s, this trend has persisted. Another example is provided by boom-bust cycles in asset prices and credit activities, which have often been associated with sharp economic contractions. In sum, the recent period has experienced some amplification of financial cycles, compared with business cycles. B. What are the factors underlying this possible amplification of financial cycles? Let us first consider credit cycles: •  the first factor in play is the behaviour of banks, which is closely linked to their environment. Some of them may have tended to artificially increase their return on equity through higher leverage or low provisioning during upswings. As a consequence they tend to become more fragile in the downward phase of the cycle.

But, the position and role of even smaller or medium size actors may also put them in a situation to have a strong influence on the system’s dynamics. There is a need to account for other dimensions of systemic importance such as interconnection, complexity, substitutability. Furthermore, the “systemic” character strongly depends on circumstances, the environment and the specific features of the financial system. Drawing up an a priori list of systemically important institutions would give a false sense of certainty. It may also fuel the moral hazard associated with such firms being perceived by markets as – exactly that – systemic. Various initiatives are currently discussed, including stronger cooperation between supervisors and, more controversially, additional capital charges. They certainly require further thorough analysis It is essential to avoid threshold effects and never forget that risks are continuous in nature, time-varying and state-contingent. The debate about systemic firms echoes also concerns about the activities and business models of some institutions. It is especially so in countries where public intervention to rescue the financial system was on a massive scale. The presumption is that smaller and leaner financial institutions would pose less risk to financial and macroeconomic stability than larger and more diversified ones. Yet, facts suggest this cannot hold as a general lesson from the crisis. Indeed, those banks which suffered most from the crisis were precisely those which were more specialized, such as the investment banks. By contrast, large universal banks, reliant on a large deposit base, could withstand the shocks comparatively better.