By the same token, they would also lessen the risk that the credit cycle would unnecessarily exacerbate the economic cycle and hence the risk of financial distress. Among such techniques are stress-testing, pre-provisioning, cyclically variable loan to value ratios, and so on.
The strengthening of the supervisory review process (Pillar 2) envisaged in the new Accord could provide a sounder basis for promoting these practices. Monetary authorities, too, are beginning to recognise the complex two-way relationship between monetary and financial stability. The seeds of future financial instability are usually sown by excessive credit expansion.