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Augusto de la Torre: Fernández de Lis and García-Herrero focus on a novel form of prudential regulation—namely, countercyclical (or dynamic) provisioning requirements. These were first introduced more than a decade ago in Spain, in July 2000. At the time, they were strongly opposed by the affected banks, international accounting bodies, and free-market advocates, but such measures are now seen as a valid regulatory option within the rapidly emerging and still fluid macroprudential policy agenda.1

The paper discusses issues in the design and implementation of the dynamic provisioning regimes in Spain (the oldest system), Colombia and Peru (newer systems, introduced in 2007 and 2008, respectively). While the authors explore the implementation of the Spanish regulations in greater depth because of the longer application period, in all three cases the analysis covers the relevant issues, including the choice between system-based versus institution-specific criteria, the degree of reliance on rules versus discretion, the allowable uses of accumulated dynamic provisions, their accounting treatment, and their tax deductibility. The comparative discussion clearly illustrates that while the differences across the three regimes are numerous and nontrivial, important general lessons can still be extracted. The paper does not attempt a quantitative analysis of impact, but it does provide a rich qualitative examination of comparative policy experiences. The paper is an important contribution to the macroprudential policy debate and provides an informative and balanced assessment of some of the key issues at stake in the field of countercyclical prudential norms.

I concentrate my comments on alternative rationales for countercyclical provisions, their implications for regulatory design, and some of the associated tensions and trade-offs. According to the paper, the rationale for countercyclical provisions stems from the systematic procyclical bias observed in financial systems. Accordingly, the draft paper reviewed reasons behind such bias, highlighting the distortions from remuneration systems (bonuses) and competition pressures, both of which lead to the underpricing of risk during good times. The revised version of the paper provides a more extensive literature review, pointing to ten possible reasons for procyclicality, which range from short-sightedness to collateral constraints, herd behavior, and financial regulation itself. Useful as this review is, it falls short of providing a satisfactory rationale. To be sure, a careful, solid grounding of macroprudential policy on economic first principles is still a pending task and goes beyond the scope of the paper.2 Nonetheless, it is hard to see why procyclicality per se warrants a regulatory response, especially considering that financial fluctuations may well reflect fundamental factors that are themselves procyclical. For example, authentic investment opportunities rise in the upswing of the business cycle, leading to a concomitant procyclical rise in credit demand. Similarly, financial activity is likely to follow the cycles associated with the Schumpeterian process of creative destruction. Moreover, as the authors themselves recognize, a rapid expansion of credit during the upswing phase of the business cycle can simply reflect sustainable financial deepening, rather than socially undesirable financial procyclicality.

In sum, financial procyclicality per se does not logically justify the introduction of dynamic provisions. Such a policy response would need to be justified by the joint existence of two conditions: a clear identification of the market failures that lead to procyclical financial trajectories that deviate from fundamentals; and a well-argued case that the resulting market equilibrium is constrained inefficient, that is, that the state has a comparative advantage over the market to improve the equilibrium. The second condition is as crucial as the first—determining that the market equilibrium is inefficient is a separate issue from assessing whether the state faces the same constraints as the private sector or, instead, has a special capacity that the market lacks to effect a Pareto-improving move via policy.

Firming up the rationale for macroprudential regulation is essential for appropriate policy design in general and for dynamic provisions design in particular. Research that I am jointly conducting with Alain Ize suggests that high payoffs can be obtained in exploring the policy rationale by distinguishing between three analytical lenses (or paradigms) that depend on the type of frictions and associated market failures that are emphasized. In all three cases, aggregate risk has to be a central...



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