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Loan Loss Provisioning Rules, Procyclicality, and Financial Volatility

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  • Pierre-Richard Agénor
  • Roy Zilberman

Abstract

Interactions between loan loss provisioning rules and business cycle fluctuations are studied in a dynamic stochastic general equilibrium model with credit market imperfections. With a backward-looking provisioning system, provisions are triggered by past due payments, which, in turn, depend on current economic conditions and the loan loss reserves-loan ratio. With a forward-looking system, both past due payments and expected losses over the whole business cycle are accounted for, and provisions are smoothed over the cycle. Experiments show that holding more provisions can reduce the procyclicality of the financial system. However, a forward-looking provisioning regime can increase or lower procyclicality, depending on whether holding more loan loss reserves translates into a higher or lower fraction of nonperforming loans. A credit gap-augmented Taylor rule, coupled with a backward-looking provisioning system may be quite effective at mitigating real and financial volatility

Suggested Citation

  • Pierre-Richard Agénor & Roy Zilberman, 2013. "Loan Loss Provisioning Rules, Procyclicality, and Financial Volatility," Centre for Growth and Business Cycle Research Discussion Paper Series 184, Economics, The Univeristy of Manchester.
  • Handle: RePEc:man:cgbcrp:184
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    File URL: http://hummedia.manchester.ac.uk/schools/soss/cgbcr/discussionpapers/dpcgbcr184.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Primus, Keyra, 2017. "Excess reserves, monetary policy and financial volatility," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 153-168.
    2. Agénor, Pierre-Richard & Pereira da Silva, Luiz, 2017. "Cyclically adjusted provisions and financial stability," Journal of Financial Stability, Elsevier, vol. 28(C), pages 143-162.
    3. Ag�nor, Pierre-Richard & Gambacorta, Leonardo & Kharroubi, Enisse & Lombardo, Giovanni & Pereira da Silva, Luiz A., 2017. "The International Dimensions of Macroprudential Policies," CEPR Discussion Papers 12108, C.E.P.R. Discussion Papers.
    4. Agénor, Pierre-Richard & Pereira da Silva, Luiz, 2017. "Cyclically adjusted provisions and financial stability," Journal of Financial Stability, Elsevier, vol. 28(C), pages 143-162.
    5. repec:wsi:afexxx:v:12:y:2017:i:03:n:s2010495217500130 is not listed on IDEAS
    6. Oscar Valencia & Daniel Osorio & Pablo Garay, 2016. "The Role of Capital Requirements and Credit Composition in the Transmission of Macroeconomic and Financial Shocks," Borradores de Economia 954, Banco de la Republica de Colombia.
    7. repec:lan:wpaper:68464009 is not listed on IDEAS
    8. repec:col:000107:016031 is not listed on IDEAS
    9. Serafín Frache & Javier García-Cicco & Jorge Ponce, 2017. "Countercyclical Prudential Tools in an Estimated DSGE Model," Documentos de Trabajo (working papers) 0917, Department of Economics - dECON.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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