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Loan loss provisioning and economic slowdowns: too much too late?

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  • Luc Laeven
  • Giovanni Majnoni

Abstract

Only recently the debate on bank capital regulation has devoted specific attention to the role that bank loan loss provisions can play as a part of the overall minimum capital regulatory framework. Several national regulators have adopted or are planning to introduce a cyclically adjustable requirement for loan loss provisions and the Basel Committee on Banking Supervision is considering how to address provisioning practices within a broad bank capital regulatory framework. This paper contributes to the ongoing debate by exploring the available evidence about bank loan loss provisioning around the world. We find that many banks tend to delay provisioning for bad loans until too late, when cyclical downturns have already set in, possibly magnifying the impact of the economic cycle on banks' income and capital. At the same time, we find a considerable difference in patterns followed by banks around the world.

Suggested Citation

  • Luc Laeven & Giovanni Majnoni, 2002. "Loan loss provisioning and economic slowdowns: too much too late?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbcp:y:2002:x:6
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    Keywords

    Risk management ; Loans;

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