Personally, I prefer dynamic provisions but any of the methods is preferable to the existing situation. 4. Correction of the pro-cyclical bias of present accounting standards, which allow profits to be increased with unrealized capital gains in periods of booming asset prices, and exaggerate declining profits in bad times through the effect of unrealized capital losses.
Besides the changes in standards to permit a more flexible treatment of asset prices in periods of market stress and illiquidity, there is the need to introduce a concept of an Economic Cycle Reserve, along the lines proposed in the Turner Review, calculated with the same method used in the previous item (3), in order to set aside profit in good times to reduce losses in depressed economic cycles of the future.