Provisioning rules and bank lending: A theoretical model
AbstractThis paper develops a partial equilibrium model of a banking firm to analyze how provisioning rules influence loan market fluctuations. We show that a backward-looking provisioning system amplifies the pro-cyclicality of loan market fluctuations. We demonstrate that, in a forward-looking provisioning system where statistical provisions are used to smooth the evolution of total loan loss provisions, the issue of pro-cyclicality of loan market fluctuations does not exist. Our results support the recent call of the Basel Committee for the implementation of a forward-looking provisioning system to address procyclicality.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Financial Stability.
Volume (Year): 8 (2012)
Issue (Month): 1 ()
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Web page: http://www.elsevier.com/locate/jfstabil
Loan market; Provisioning system; Pro-cyclicality;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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