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Dynamic provisioning: rationale, functioning, and prudential treatment

  • Marco Burroni


    (Banca d'Italia)

  • Mario Quagliariello


    (Banca d'Italia)

  • Emiliano Sabatini


    (Banca d'Italia)

  • Vincenzo Tola


    (Banca d'Italia)

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 procyclicality". 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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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
Date of revision:
Handle: RePEc:bdi:opques:qef_57_09
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