These buffers, created in periods of good economic conditions and necessarily associated with the adequate mechanisms to draw them down during recessions, may come in the form of non-distributable reserves to compensate economiccycle losses. Nevertheless, the possible advantages and disadvantages of such a measure should be accurately calculated and appropriately compared to those coming from other tools that act in the same way but affect the profit and loss account. 2  BIS Review 55/2009  We should not forget the interconnection that exists between valuation, leverage and procyclicality and how these issues should be properly managed under a macro-prudential perspective. The introduction of supplementary floors to capital requirements under a risksensitive approach, could be a safety net,. Setting limits on the build-up of leverage in periods of rapid credit growth can be seen as a way of strengthening the incentives for correct risk pricing of institutions, as well as a deterrent of excessive risk-taking. Furthermore, the development of valuation reserves should also be under our consideration as a way to mitigate the cyclicality inherent in risky and illiquid securities. Improvement of general stress test practices and their wide implementation, particularly during the most favorable part of the economic cycle, should also be included in our toolbox approach to fight against procyclicality. Solid stress test frameworks will allow assessing the adequacy of buffers, both in their construction and in their applicability over the cycle. Finally, remuneration schemes may be another tool for dampening the undesired cyclical fluctuations of banking activity.

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.