Dynamic provisioning: rationale, functioning, and prudential treatment
AbstractCurrent policy debate has renewed interest in countercyclical provisioning policies; dynamic provisions are regarded as a valuable device for pursuing this goal. Last July, Ecofin supported â€œthe introduction of forward-looking provisioning, which consists in constituting provisions deducted from profits in good times for expected losses on loan portfolios, and which would contribute to limiting procyclicalityâ€. This paper describes: i) how dynamic provisions work in a general framework based on expected losses; ii) how they work according to the Spanish system, which is the only real example of countercyclical provisioning; iii) the differences and similarities between the expected loss model and the Spanish approach. Building on proposals currently under discussion in the international community, it also suggests a possible way forward for introducing a system of dynamic provisions that, while meeting the prudential goal of having more conservative provisioning policies, would not clash with accounting standards.
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Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Questioni di Economia e Finanza (Occasional Papers) with number 57.
Date of creation: Nov 2009
Date of revision:
dynamic provisions; capital buffers; Basel 2; credit risk; procyclicality;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ACC-2009-12-05 (Accounting & Auditing)
- NEP-ALL-2009-12-05 (All new papers)
- NEP-REG-2009-12-05 (Regulation)
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- Gabriel Jiménez & Steven Ongena & José-Luis Peydró & Jesús Saurina, 2012.
"Macroprudential Policy, Countercyclical Bank Capital Buffers and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments,"
628, Barcelona Graduate School of Economics.
- Jiménez, G. & Ongena, S. & Peydro, J.L. & Saurina, J., 2012. "Macroprudential Policy, Countercyclical Bank Capital Buffers and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments," Discussion Paper 2012-036, Tilburg University, Center for Economic Research.
- Gabriel Jiménez & Steven Ongena & José-Luis Peydró & Jesús Saurina, 2012. "Macroprudential policy, countercyclical bank capital buffers and credit supply: Evidence from the Spanish dynamic provisioning experiments," Economics Working Papers 1315, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2013.
- Gabriel Jiménez & Steven Ongena & José-Luis Peydró & Jesús Saurina, 2012. "Macroprudential policy, countercyclical bank capital buffers and credit supply: Evidence from the Spanish dynamic provisioning experiments," Working Paper Research 231, National Bank of Belgium.
- Jorge A. Chan-Lau, 2012. "Do Dynamic Provisions Enhance Bank Solvency and Reduce Credit Procyclicality? A Study of the Chilean Banking System," IMF Working Papers 12/124, International Monetary Fund.
- International Monetary Fund, 2011. "Policy Instruments To Lean Against The Wind In Latin America," IMF Working Papers 11/159, International Monetary Fund.
- International Monetary Fund, 2012. "Dynamic Loan Loss Provisioning: Simulations on Effectiveness and Guide to Implementation," IMF Working Papers 12/110, International Monetary Fund.
- Cristina Bernini & Paola Brighi, 2011. "Relationship Lending, Distance and Efficiency in a Heterogeneous Banking System," Working Paper Series 41_11, The Rimini Centre for Economic Analysis.
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