So much for dynamic provisioning

Nice piece in Bloomberg by Jonathan Weil (The EU Smiled While Spain’s Banks Cooked the Books), pointing out the perverse effects of the Spanish regulatory practice of demanding that banks adjust their accounts for the potential vagueries of the economic cycle ('dynamic provisioning'), supposedly giving them a buffer against downturns.

Turns out that Spanish banks were able in this way to hide their losses from the popping of the housing bubble until quite recently. Has this helped smooth the financial consequences of the downturn? No need to answer that question.

All this goes to show that tweaking accounting practices is never going to achieve much if the financial system is based on the kind of Ponzi schemes we've been seeing in the past two-three decades. Governments are going to have to start getting on top of what banks do, and providing better regulatory and fiscal incentives to real investment in real productive activities. How do they do this? Don't ask me, I'm not an economist.