Dynamic Loan Loss Provisioning: Simulationson Effectiveness and Guide to Implementation
May 1, 2012
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Summary
This simulation-based paper investigates the impact of different methods of dynamic provisioning on bank soundness and shows that this increasingly popular macroprudential tool can smooth provisioning costs over the credit cycle and lower banks’ probability of default. In addition, the paper offers an in-depth guide to implementation that addresses pertinent issues related to data requirements, calibration and safeguards as well as accounting, disclosure and tax treatment. It also discusses the interaction of dynamic provisioning with other macroprudential instruments such as countercyclical capital.
Subject: Banking, Basel II, Countercyclical capital buffers, Credit, Credit cycles, Financial institutions, Financial regulation and supervision, Financial sector policy and analysis, Loans, Money
Keywords: Basel II, Countercyclical capital buffers, Credit, Credit cycles, DP buffer, DP concept, DP fund, DP parameter, DP path, DP rate, DP system, DP system great care, Dynamic Provisioining, Global, income statement, Latin America, loan loss, loan portfolio, Loans, Macroprudential Policy, Peruvian DP formula, Procyclicality, profit and loss statement, recording DP, WP
Pages:
59
Volume:
2012
DOI:
Issue:
110
Series:
Working Paper No. 2012/110
Stock No:
WPIEA2012110
ISBN:
9781475503319
ISSN:
1018-5941
