Instruments for Curbing Fluctuations in Lending over the Business Cycle

This article sets out to discuss instruments for reducing procyclical bank lending behaviour. Special attention is given to how much the regulatory framework contributes to the procyclicality of the financial system. The main subject of the article is the dynamic provisioning regime currently under discussion as one of the possible regulatory responses to the ongoing global financial crisis. The analysis reveals that Czech banks are among those that provision in a procyclical manner. On the theoretical level, therefore, dynamic provisioning could in the Czech economy help create a buffer during good times which could then be used during recessions. On the practical level, however, dynamic provisioning would for numerous reasons be difficult to introduce and would first need to be aligned with the other components of the international framework for the regulation of financial institutions.