Pro-Cyclical Lending: AI Amplifying Market Cycles

Here's the cycle:

1. Market stress hits → AI model predicts tighter lending terms

2. All major banks use similar AI → lending tightens simultaneously

3. Reduced lending deepens the downturn

4. Deeper downturn validates model caution

5. Models tighten even more

This is pro-cyclicality. The AI isn't wrong—property values ARE falling. But by tightening lending at the worst moment, the AI amplifies the cycle.

Basel III has counter-cyclical buffers designed to prevent this. But those buffers assume humans can override model decisions.

When 99% of decisions are automated, buffer mechanisms become inert.

ACRGA-CYCLE creates mandatory human override protocols. Governance committee can challenge model caution during downturns.

#Banking #RiskManagement #FinancialStability