Thus the second component is countercyclical in nature which builds up during upturns and is drawn during downturns. The second component is also reflective of the strength and weakness of the lending cycle depending upon the addition/drawals made from the general provision.
Alpha and beta were calibrated by Bank of Spain for six homogeneous risk categories ranging from zero risk (cash, public sector debt, etc.) to high risk (credit cards and overdrafts). An option was also given to banks to use their own calibrated parameters based on their own credit histories and experiences, subject to supervisory approval. Let me give an example to make things clearer.