This provision builds up a buffer during the benign part of the cycle, which starts to be released when recession comes knocking on banks’ doors. Counter-cyclicality is intrinsic to dynamic provisions and part of its usefulness can be seen in the resilience shown so far by Spanish banks in the current crisis. Furthermore, its direct impact on the profit and loss account (reflecting losses at a time when these losses are really being built up in balance sheets) constitutes a way to make banks more aware of how credit must be priced, reducing the underestimation of loans risk premia and, to some extent, compensating the relaxation of credit granting standards in good times. It also delivers the right information to investors about the financial position of the bank. In all, dynamic provisioning allows a proper recognition of credit risk. I must also admit that there are voices raised by some institutions that do not agree with this view, and particularly, accounting standard setters. In this respect, we should call for further dialogue between accounting rule setters and supervisors as well as a clarification regarding roles and objectives of each of them. I really think that our objectives are compatible and that delivering the relevant information to investors should not be an impediment for supervisors to ensure the stability of the banking sector by promoting the most adequate measures that experience and results have proved to be useful. Very much in line with dynamic provisions, the buildup of capital buffers also deserves room in our discussions.
Miguel Fernández Ordóñez: Procyclicality in the banking activity Speech by Mr Miguel Fernández Ordóñez, Governor of the Bank of Spain, at the Conference on Procyclicality and the Role of Financial Regulation, organised by the Bank of Spain and the Financial Stability Institute, Madrid, 4 May 2009. *  *  *  Good morning ladies and gentlemen. First of all I would like to welcome you to the Bank of Spain. Also, let me thank you all for your presence here today to discuss on one of the most difficult and relevant topics affecting financial regulation: procyclicality in banking activity. Let me also thank the BIS Financial Stability Institute, and in particular its Chairman, Mr. Josef Tošovský, for all the support and good advice received during these last few weeks during the preparation of this event that we have co-organized. We are very pleased to have as speakers in this conference a large group of excellent professionals who are directly involved in financial supervision and regulation. A high level meeting like this one is a major opportunity to start building up a common and efficient framework in order to face the procyclicality issue. Cyclicality can be considered an inherent part of economic activity. Banking activity is no exception; it is also affected by the upswings and downturns of the real sector cycles. Not only history proves this, but current events do also. Any doubt about this has been violently resolved after the summer of 2007.