Capital rules, accounting policies, and other regulatory standards should not make this job even more difficult by encouraging excessively procyclical behavior by financial institutions – that is, behavior that causes financial institutions to tighten credit in downturns and ease credit in booms more than is justified by changes in the creditworthiness of borrowers.
No one questions the underlying objectives of capital rules and accounting standards, which are to ensure the safety and soundness of financial institutions and to accurately and transparently disclose an institution's financial condition, respectively. However, some aspects of existing capital rules and accounting standards may unduly magnify the ups and downs in the financial system and the economy.