This provision builds up a buffer during the benign part of the cycle, which starts to be released when recession comes knocking on banks’ doors. Counter-cyclicality is intrinsic to dynamic provisions and part of its usefulness can be seen in the resilience shown so far by Spanish banks in the current crisis. Furthermore, its direct impact on the profit and loss account (reflecting losses at a time when these losses are really being built up in balance sheets) constitutes a way to make banks more aware of how credit must be priced, reducing the underestimation of loans risk premia and, to some extent, compensating the relaxation of credit granting standards in good times. It also delivers the right information to investors about the financial position of the bank. In all, dynamic provisioning allows a proper recognition of credit risk. I must also admit that there are voices raised by some institutions that do not agree with this view, and particularly, accounting standard setters. In this respect, we should call for further dialogue between accounting rule setters and supervisors as well as a clarification regarding roles and objectives of each of them. I really think that our objectives are compatible and that delivering the relevant information to investors should not be an impediment for supervisors to ensure the stability of the banking sector by promoting the most adequate measures that experience and results have proved to be useful. Very much in line with dynamic provisions, the buildup of capital buffers also deserves room in our discussions.

The programme had three key policy goals: (i) to stabilise the exchange rate, (ii) to put government finances on a sustainable path and (iii) to rebuild a financial sector serving the domestic economy. The first goal was imperative in order to stop an adverse spiral of fading confidence, exchange rate depreciation, and increased inflation and inflation expectations. It was also needed in order to stop the negative balance sheet effects coming through FX-denominated or FX-linked loans and CPI-indexed loans. The second, fiscal sustainability, was needed in order to stop adverse public debt dynamics from turning an external liquidity crisis into a potential solvency issue, which would have made it impossible to regain internal and external trust in the Icelandic economy. The third, financial sector reconstruction, is a precondition for private sector debt restructuring and economic recovery. As a result, exchange rate stability became the first priority of monetary policy. However, given the lack of confidence and the overhang of non-resident holdings of speculative ISK positions, estimated at the time to amount to ISK 600 bn, it would have required exorbitant  2  BIS Review 139/2010  interest rates to stabilise the exchange rate through interest rate policy alone, and the room for manoeuvre to use monetary policy to support the domestic economy would have been non-existent, at least in the short run. For this reason, it was decided to introduce comprehensive capital controls, which allowed more space to lower interest rates in line with falling inflation and provide some support to the domestic economy.