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Bank Loan Classification and Provisioning Practices in Selected Developed and Emerging Countries

Author

Listed:
  • Alain Laurin
  • Giovanni Majnoni

Abstract

This report reviews loan classification and provisioning practices in a broad sample of countries that differ in size, location and level of financial development. The survey conducted for the report compares the regulatory approaches adopted by industrial and emerging economies, and is intended to complement other sources of information that focus exclusively on either industrial or developing countries. It covers classification of individual and multiple loans, treatment of guarantees, collateral and restructured loans, bank loans review processes, loan loss provisioning, tax treatment of loan loss provisions, disclosure standards, and external auditors' role. Differences in provisioning and classification approaches have often made difficult a comparison of bank and banking system weaknesses across regulatory regimes. Poor classification and provisioning practices have led to solvency ratios that gave a false sense of security, as occurred when seemingly adequately capitalized financial systems failed in the 1990s. Successful regulatory harmonization therefore requires a set of minimum standards for loan classification that is grounded in sound risk management practices, but that is also sufficiently general to recognize differences in national economic and legal environment. The evidence this report provides is intended to contribute to this difficult task.

Suggested Citation

  • Alain Laurin & Giovanni Majnoni, 2003. "Bank Loan Classification and Provisioning Practices in Selected Developed and Emerging Countries," World Bank Publications, The World Bank, number 15157, July.
  • Handle: RePEc:wbk:wbpubs:15157
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    References listed on IDEAS

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    1. Laeven, Luc & Majnoni, Giovanni, 2003. "Loan loss provisioning and economic slowdowns: too much, too late?," Journal of Financial Intermediation, Elsevier, vol. 12(2), pages 178-197, April.
    2. International Monetary Fund, 2000. "Loan Review, Provisioning, and Macroeconomic Linkages," IMF Working Papers 00/195, International Monetary Fund.
    3. Claudia H Dziobek, 1996. "Regulatory and Tax Treatment of Loan Loss Provisions," IMF Policy Discussion Papers 96/6, International Monetary Fund.
    4. Larry D. Wall & Timothy W. Koch, 2000. "Bank loan-loss accounting: a review of theoretical and empirical evidence," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 1-20.
    5. Timothy W. Koch & Larry D. Wall, 1999. "Banks' discretionary loan loss provisions: how important are constraints and asymmetries?," Proceedings 618, Federal Reserve Bank of Chicago.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Patrick Honohan, 2004. "Alternative Approaches to Taxing the Financial Sector: Wich is Best and Where Does Chile Stand?," Central Banking, Analysis, and Economic Policies Book Series,in: Luis Antonio Ahumada & J. Rodrigo Fuentes & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking Market Structure and Monetary Policy, edition 1, volume 7, chapter 11, pages 315-344 Central Bank of Chile.
    2. Lepetit, Laetitia & Strobel, Frank & Dickinson, David G., 2012. "Does uncertainty matter for loan charge-offs?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 264-277.
    3. repec:eee:jaecon:v:63:y:2017:i:2:p:307-328 is not listed on IDEAS
    4. Honohan, Patrick, 2003. "Avoiding the pitfalls in taxing financial intermediation," Policy Research Working Paper Series 3056, The World Bank.
    5. Buncic, Daniel & Melecky, Martin, 2013. "Macroprudential stress testing of credit risk: A practical approach for policy makers," Journal of Financial Stability, Elsevier, vol. 9(3), pages 347-370.
    6. Bholat, David & Lastra, Rosa & Markose, Sheri & Miglionico, Andrea & Sen, Kallol, 2016. "Non-performing loans: regulatory and accounting treatments of assets," Bank of England working papers 594, Bank of England.
    7. Tomislav Ridzak, 2012. "Are some Banks More Lenient in the Implementation of Placement Classification Rules?," Working Papers 32, The Croatian National Bank, Croatia.
    8. repec:eee:jaecon:v:63:y:2017:i:2:p:454-478 is not listed on IDEAS

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