At current rates, the statistical fund will reach its peak at the end of 2004. As far as the cyclical behaviour of banks, it is too soon to say, but we tend to think that the anti-cyclical nature of the statistical provision is influencing bank behaviour. I must confess that gaining acceptance among banking institutions for our new provisioning scheme was not easy. Banks were reluctant to see their bottom line profits indented, arguing that the Spanish provisioning system was already demanding (tight asset classification rules plus on-site monitoring and enforcement by Bank of Spain inspectors, not to mention high solvency ratios by international standards). Apart from banks’ initial, and understandable, criticism, some other voices have been raised, although not very loudly, against dynamic provisioning. Some of them can be readily refuted. Others merit careful discussion because the alternatives they propose may affect financial stability. The most obvious criticism is that a system of dynamic provisioning smoothes bank profits. It is true that the statistical provision tends to smooth profits over the course of the cycle. But it is no less true that the current ex post provisioning system (i.e. setting aside a specific provision when the impaired asset appears) artificially increases the volatility of banks’ profits. And what is more important, this increased volatility in the latter case has less to do with economic fundamentals (I. e. expected losses) than with accounting rules. If expected losses appear from the beginning of the operation, banks should start to provision them at the very outset.

Fourth, the use of common assessment and risk management tools by market participants, and finally an excessive and shortsighted focus on “shareholder value” may also amplify swings. Prudential regulations may also occasionally have proven conducive to an excessive emphasis on the short term when assessing risks. What can the authorities do to counter these tendencies? Debate among academics, policymakers and market participants has been intense in recent years, and is far from settled. This is an area particularly open to discussion, where new ideas and new evidence are forthcoming. Indeed, the way monetary stability and financial stability interact with each other seems a particularly complex topic, and the impact of specific measures on both fields is uncertain. As far as monetary policy is concerned, the debate on whether it should react to asset prices has been one of the most interesting of recent years. Insofar as asset prices contain useful information that helps predict future price -and output- developments, they should clearly be included in the set of indicators the central bank uses for decision-making. This is not, however, as easy as it may sound. First, because empirical evidence on the usefulness of asset prices in predicting future price and output developments is not conclusive. And second, because the integration of asset prices in macroeconomic models poses a series of practical difficulties. 2  BIS Review 35/2002  Going one step further, a related question is whether monetary policy should react directly to asset prices, over and above the impact of the latter on inflationary prospects.