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Dynamic provisioning: a buffer rather than a countercyclical tool?

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  • Santiago Fernandez de Lis
  • Alicia Garcia-Herrero
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    Abstract

    This paper analyzes whether dynamic provisioning systems act as a dampener -as intended- or as a buffer. After briefly reviewing the literature, we explain the rationale for dynamic provisions and analyze the experience of three of the few countries that adopted them: Spain, Colombia and Peru. We conclude that in the case of Spain, which is the only one where dynamic provisions worked over a complete cycle, the fact that market discipline only operated in the downturn implied that the system acted more as a buffer than as a dampener. We also observe that even rule-based systems tend to be applied in a discretionary way, since they require a very reliable calibration of the cycle \\\"ex ante\\\", an assumption that has proven unrealistic. The comparison of the Spanish system versus the Peruvian and Colombian raises interesting policy conclusions on whether dynamic provisioning should be applied differently to industrial versus emerging countries.

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    Bibliographic Info

    Paper provided by BBVA Bank, Economic Research Department in its series Working Papers with number 1222.

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    Length: 22 pages
    Date of creation: Oct 2012
    Date of revision:
    Handle: RePEc:bbv:wpaper:1222

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    Keywords: financial stability; macroprudential; anticyclical;

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