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Provisioning rules and bank lending : A theoretical model

Author

Listed:
  • Vincent Bouvatier
  • Laetitia Lepetit

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

Abstract

This paper develops a partial equilibrium model of a banking firm to analyze how provisioning rules influence loan market fluctuations. We show that a backward-looking provisioning system amplifies the pro-cyclicality of loan market fluctuations. We demonstrate that, in a forward-looking provisioning system where statistical provisions are used to smooth the evolution of total loan loss provisions, the issue of pro-cyclicality of loan market fluctuations does not exist. Our findings support the call for the implementation of a dynamic provisioning system.

Suggested Citation

  • Vincent Bouvatier & Laetitia Lepetit, 2012. "Provisioning rules and bank lending : A theoretical model," Post-Print hal-00785520, HAL.
    • Handle: RePEc:hal:journl:hal-00785520
    DOI: 10.2139/ssrn.1148314
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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