The tendency of financial variables to fluctuate, as per a certain pattern or trend, during the economic cycle. A procyclical variable fluctuates in a way that is positively correlated with the economic cycle (as reflected in business activity- e.g., gross domestic product, GDP). Increased procyclicality simply implies fluctuations with bigger proportions, and vice versa.

Procyclic or procyclical describes a condition of a positive correlation between the value of an asset or an economic indicator (variable) and the overall state (performance or direction) of the economy.

In banking, procyclicality implies a positive relationship between a financial variable (e.g., credit, money supply, etc.) and the broader economic conditions. Normally, loan loss provisions are “negatively” related to GDP growth, however, this variable is procyclical (the better the GDP growth, the better (i,e., the lower) the losses, and hence the lower the provisions). These provisions tend to show higher procyclicality at larger and better capitalized banks.

A high procyclicality of banks’ loan loss provisioning is undesirable from a financial stability standpoint, as it implies that bank equity (capitalization) is more negatively affected at the lower part of the economic cycle (trough)- i.e., capital market conditions for banks are at the lowest. Furthermore, the procyclicality of loan loss provisions can be a driver of cyclical loan supply, as lower bank equity during economic downturns can lead to a credit crunch.