Moreover, it seemed natural to think that the increased dispersion of risk would make the financial system more, rather than less, stable, a view that was certainly held by the former Chairman of the US Federal Reserve, Alan Greenspan: “These increasingly complex financial instruments have been especial contributors, particularly over the past couple of stressful years, to the development of a far more flexible, efficient, and resilient financial system than existed just a quarter-century ago.” (Greenspan, 2002). Accompanying this expansion in credit, there was also a rise in certain asset prices, particularly that of housing, in those countries where credit rose most sharply (see Fig. 3). But significantly, that explosion in credit was not associated with a marked expansion either in the demand for goods and services, or in consumer price inflation. It is also notable that the run-up in house prices in the United States was less marked than in the other Anglophone countries and Spain. In part, that may reflect a more elastic response in the construction of new houses in the United States. The point to stress is that there was nothing self-evidently wrong with this expansion in balance sheets and the associated rise in asset prices. There is some evidence from developing economies that suggests that increased development in financial markets helps to foster growth and catch-up. And if financial innovation allows households to gain access to mortgage finance where they were previously unable to, one should expect that to lead to a rise in the real price of houses.

For a successful implementation of the new loss-measure approach, banks’ forecasting capacity in respect of economic downturns and anticipation of significant deterioration of both credit standards and credit risk are key. As such, banks should strive to apply and use the appropriate procedures to ensure the timely determination of future significant increases in credit risk and, more generally, they should be able to properly adjust their models and predictions to the existing macroeconomic conditions at any time, regardless of how frequently they may change. Let me briefly review what may be considered the main challenges for this new paradigm of provisioning, rightly following the content of each of the conference panels. Panel I of the conference will enlighten us with relevant background information to fully understand why and how the new provisioning model has changed, the potential pros and cons of alternative approaches, the differences between models and the reasons behind those differences. As briefly commented, modelling expected losses is a challenge. In Panel 2, views from academia, practitioners and auditors will no doubt help us to broaden our perspective on issues such as the existing differences between the models needed to calculate the new provisions and those already in use for regulatory purposes, or for internal credit risk management. Implementation issues, apart from the pure modeling challenges, such as compliance costs, reliable reporting under the new standards, comparability of financial statements across institutions, internal organisation, etc. are highly interesting aspects that will also be presented from the industry and supervisory viewpoint in Panel 3.