This warrants some rethinking of the adjustment programmes’ target set-up so as to prevent the return effect of GDP developments on compliance with the budgetary targets – through tax revenues and social spending – and debt targets – through tax revenues, social spending and the “denominator effect”.
Third is establishment of regular stress testing and capital planning. These complementary supervisory tools serve two related functions. First, they make capital regulation more forward-looking by subtracting losses in asset values and earnings estimated to be sustained in an adverse macroeconomic scenario, in order to determine whether firms would have enough capital to remain viable financial intermediaries.