While varying stress test scenarios with the cycle can help to offset some of the financial system’s procyclical tendencies, other regulatory measures, such as a countercyclical capital buffer, may be better suited to address the specific vulnerabilities arising from procyclical leverage.
Indeed, sterilised purchases of foreign exchange can be expensive when the central bank earns a lower interest rate on the foreign currency reserves than it pays on the instruments that are issued in the sterilisation process.