Loan Loss Provisioning Rules, Procyclicality, and Financial Volatility
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
|Date of creation:||2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (0)161 275 4868
Fax: (0)161 275 4812
Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/our-research/centre-for-growth-and-business-cycle-research/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Pierre-Richard Agénor & Koray Alper, 2012.
"Monetary shocks and central bank liquidity with credit market imperfections,"
Oxford Economic Papers,
Oxford University Press, vol. 64(3), pages 563-591, July.
- Pierre-Richard Agenor & Koray Alper, 2009. "Monetary Shocks and Central Bank Liquidity with Credit Market Imperfections," Working Papers 0906, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
- Pierre-Richard Agénor & Koray Alper, 2009. "Monetary Shocks and Central Bank Liquidity with Credit Market Imperfections," Centre for Growth and Business Cycle Research Discussion Paper Series 120, Economics, The Univeristy of Manchester.
- Bouvatier, Vincent & Lepetit, Laetitia, 2012. "Provisioning rules and bank lending: A theoretical model," Journal of Financial Stability, Elsevier, vol. 8(1), pages 25-31.
- Anthony Coleman & Neil Esho & Ian Sharpe, 2006. "Does Bank Monitoring Influence Loan Contract Terms?," Journal of Financial Services Research, Springer, vol. 30(2), pages 177-198, October.
- Eliana Balla & Morgan J. Rose & Jessie Romero, 2012. "Loan loss reserve accounting and bank behavior," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, issue Mar.
- John R. Walter, 1991. "Loan loss reserves," Economic Review, Federal Reserve Bank of Richmond, issue Jul, pages 20-30.
- Torsten Wezel & Jorge A. Chan-Lau & Francesco Columba, 2012. "Dynamic Loan Loss Provisioning: Simulationson Effectiveness and Guide to Implementation," IMF Working Papers 12/110, International Monetary Fund.
When requesting a correction, please mention this item's handle: RePEc:man:cgbcrp:184. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marianne Sensier)
If references are entirely missing, you can add them using this form.