to rely on future margin income might be an overly adventurous stance. let me expand more on this. first of all, experience has painfully shown us that the pricing of a loan is not always properly adjusted to the risk involved in the operation ( even taking into account fees and future customer relationships ). i have already talked about strong competition for market share or over - optimism. secondly, even if the risk is properly priced, the proceeds from a high margin could have been paid out to shareholders by the time the impairment appears. moreover, dynamic provisioning allows for a timely recognition of both the income and costs stemming from bank loan portfolios. an alternative to the current accounting framework is being promoted at some international fora. i am talking about full fair value accounting ( ffva ), i would like underline the word “ full ”. it is quite clear to me that ffva has, for the time being, insurmountable drawbacks for commercial banks both of theoretical and practical nature. i would place a big question mark over ffva feasibility. dynamic provisioning is a reasonable approach to the fair value of a loan without the numerous drawbacks of ffva. the statistical provision does not increase volatility of profits and facilitates prudent risk management. to conclude, let me emphasise that this provisioning regulation in spain was introduced for prudential reasons. it has three main advantages : first, it provides banks with incentives for better risk management ( i. e. risk appraisal, pricing, internal models, etc. ). second, it reconciles good risk management with sound and prudent accounting practices. and finally, it is anti - cyclical in nature ( therefore mitigating the tendency to reinforce cycles ). overall, these three advantages can be summarised as one : they reinforce the soundness of each single banking institution and of the whole system. my answer to the first question posed at the beginning of this speech is that, although risk management techniques may induce risk - sensitive behaviour, and risk - sensitive usually means pro - cyclical, that is not necessarily the case when some good regulatory practices, such as dynamic provisioning, are adopted, contributing to taming economic and financial cycles. let me finish by adding a word of caution. regulatory devices per se do not suffice to attain a safe and sound banking system. a proper risk management culture deeply ingrained in banks ’ practices is also a necessary condition to reach that goal. consequently,

in the banking sector has perhaps something to learn from insurance practices. theoretical papers on bank credit risk management also go in the same direction, stressing the importance of proper pricing ( i. e. the interest rate charged should cover expected losses as well as the cost of holding capital for unexpected losses ). estimating expected losses when the bank assesses the borrower is the first step for sound risk management. proper risk management is obviously a primary task of bank managers and shareholders. but we, as bank supervisors, should evaluate the effectiveness of a bank ’ s policies and practices for assessment of loan quality and provisioning practices. the ability of a bank ’ s loan review system to identify, classify, monitor and address loans with credit quality problems in a timely manner should be assessed by the supervisor on a regular basis as part of its risk - based approach. a misclassification of assets ( and the corresponding under - provisioning ) is always present in banks heading for profitability and solvency difficulties. sound credit risk management practices at the banks ’ level, including acknowledgement of expected losses in due time, collide to a certain extent with the current accounting framework. the problem stems from the fact that this framework does not support the notion of provisions on the basis of expected losses, with the result that the recognition of losses is frequently delayed. some of the answers given by accounting - rules setters to this problem ( i. e. full fair value accounting ) may have other important drawbacks. i will touch upon this later. let me briefly summarise the content of our dynamic provision. in december 1999, the bank of spain introduced a new solvency provision, the so - called statistical or dynamic provision, focusing on the statistical risk embedded in the unimpaired portfolio. it started to apply in july 2000. the main idea behind this provision is to try to capture, together with the other provisions of the spanish system, expected losses. from the very moment that a loan is granted, and before any impairment on this specific loan appears, there is a positive default probability ( no matter how low it might be ) following a statistical distribution with an expected loss. the expected loss is known in a statistical sense but not yet identified in a specific loan operation or borrower. as the risk appears at the beginning of the operation, so does the statistical provision requirement. with this system, provisions run in parallel to revenues and are therefore distributed through the cycle allowing for a better mapping between income and costs in