The resultant changes in the cost and availability of credit will be pro-cyclical, that is, will exacerbate cyclical patterns in the real economy.
But we should recognize some important responses that have emerged from regulators and markets: flatter risk functions have been adopted in the Basel II proposal; banks maintain buffer capital stocks; Basel II requires that, under Pillar 2, supervisors and banks discuss the size of the necessary buffer capital that each bank should carry for cyclical purposes; and the proposed rules require stress-testing of risk parameters.