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Dynamic provisioning: rationale, functioning, and prudential treatment

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Author Info

  • Marco Burroni

    ()
    (Banca d'Italia)

  • Mario Quagliariello

    ()
    (Banca d'Italia)

  • Emiliano Sabatini

    ()
    (Banca d'Italia)

  • Vincenzo Tola

    ()
    (Banca d'Italia)

Abstract

Current 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 “the 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 Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Questioni di Economia e Finanza (Occasional Papers) with number 57.

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Date of creation: Nov 2009
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Handle: RePEc:bdi:opques:qef_57_09

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Web page: http://www.bancaditalia.it
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Related research

Keywords: dynamic provisions; capital buffers; Basel 2; credit risk; procyclicality;

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Cited by:
  1. 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.
  2. 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.
  3. 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.
  4. International Monetary Fund, 2011. "Policy Instruments to Lean Against the Wind in Latin America," IMF Working Papers 11/159, International Monetary Fund.
  5. International Monetary Fund, 2012. "Dynamic Loan Loss Provisioning," IMF Working Papers 12/110, International Monetary Fund.

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