At the same time, as indicated by the findings of the ECB’s monetary policy strategy review presented last July, it is crucial that the decisions be incremental and carefully thought through, also to avoid creating any uncertainty that could destabilize the financial markets and the economic recovery.
A large, widespread and rapid increase in loan loss provisions would have the potential to lead to pro-cyclical tightening of credit supply from banks, curtailing an economic recovery. This is why we ask banks to have more capital in good times, so that they can absorb losses in bad times.