Endnotes

¹On the possible procyclicality of Basel II, see Saurina and Trucharte (2007) and Repullo and Suarez (2008).

²See Turner (2009).

³One way of dealing with this problem, which has been discussed in some countries, is to set up an independent body to determine the business cycle.

⁴This is related to the debate on whether monetary policy should react to asset price bubbles. For a recent contribution on the link between this issue and anti-cyclical financial regulation see Fernández de Lis and Ontiveros (2009).

⁵See Miller, Marcus and Alan Sutherland (1990): The `Walters' Critique of the EMS: A Case of Inconsistent Expectations, CEPR Discussion Papers No 480 The Current Account Puzzle.

⁶Wyplosz, Charles (2008): The current account puzzle, panel discussion on “The First Ten Years of the Euro”, http://ec.europa.eu/economy_finance/pdf/2009/01/sanfran_wyplosz_en.pdf

⁷For this reason, and in order to avoid distortions in the figures, we have corrected the numbers and add this sum to the generic provisions for the remaining years.

⁸The tax treatment of generic provisions is important in this regard. Although institutions are free to provision above the minimum (and this can limit the use of the Fund in the downturn), only 1% of credit (the level of the old generic provision) is tax-deductible.

⁹The revision has been finalized but it is not yet public so we cannot incorporate details in this paper.

¹⁰There is another regulation for consumer loans which makes generic provisions more institution-specific, forcing lenient banks to increase them if they lend to over-indebted clients.

¹¹There is a terminology problem, despite the fact that the three countries considered here share the same language: the Peruvian system is called “pro-cyclical” since the new provisions move with GDP. This is labelled “anti-cyclical” in the Spanish and Colombian systems (and in international discussions) since provisions contribute to smooth the cycle.

¹²The rules-based nature of each system depends a lot, however, on its practical implementation. The Spanish system, for example, was adjusted in the upturn (2004) and again very recently in the downturn (July 2009). This later change reduced the provisioning effort of certain mortgage loans, taking into account the recovery expectation of the sale of the property. A lesson in this regard would be that even the rules-based systems would inevitably be applied in a discretionary way.

¹³See the simulations included in Fernández de Lis, Martínez, and Saurina (2001).

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