The effects on the supply of credit in the short term will need to be carefully monitored. In the longer run, the positive relationship between banks’ capital and growth in lending will be reinforced. The challenges immediately ahead In the closing months of last year the flow of new bad debts began to diminish.
However, historical experience teaches that economic recovery will improve credit quality only gradually, and with a lag. To cope with the additional loan loss provisions that will be necessary, the banking system will have to increase its efficiency further.