However, under the new accord the deterioration of a portfolio should begin to be reflected in the bank’s capital adequacy ratio at a much earlier stage, and no further deterioration should occur in the capital adequacy ratio at the moment it is recognized as an accounting loss. 7 Pro-cyclicality can be addressed by several ways.
For example supervisors have discretionary powers under Pillar 2 to demand additional capital during a business cycle expansion or banks can adjust the value of probability of default (PD) in IRB system based on the historical trend in business cycle. However, the adjusting of the IRB parameters has to be consistent and transparent.