Resource information
Most explanations of the crisis of
2007-2009 emphasize the role of the preceding boom in real
estate and asset markets in a variety of advanced countries.
As a result, an idea that is gaining support among various
groups is how to make Basel II or any regulatory regime less
pro-cyclical. This paper addresses the rationale for and
likely contribution of such policies. Making provisioning
(or capital) requirements countercyclical is one way
potentially to address pro-cyclicality, and accordingly it
looks at the efforts of the authorities in Spain and
Colombia, two countries in which countercyclical
provisioning has been tried, to see what the track record
has been. As explained there, these experiments have been at
best too recent and limited to put much weight on them, but
they are much less favorable for supporting this practice
than is commonly admitted. The paper then addresses concerns
and implementation issues with countercyclical capital or
provisioning requirements, including why their impact might
be expected to be limited, and concludes with
recommendations for developing country officials who want to
learn how to make their financial systems less exposed to crises.
