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Dynamic Loan Loss Provisioning: Simulationson Effectiveness and Guide to Implementation

Author

Listed:
  • Torsten Wezel
  • Mr. Jorge A Chan-Lau
  • Mr. Francesco Columba

Abstract

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.

Suggested Citation

  • Torsten Wezel & Mr. Jorge A Chan-Lau & Mr. Francesco Columba, 2012. "Dynamic Loan Loss Provisioning: Simulationson Effectiveness and Guide to Implementation," IMF Working Papers 2012/110, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2012/110
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    References listed on IDEAS

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    3. Cecilia Dassatti & Alejandro Pena & Jorge Ponce & Magdalena Tubio, 2015. "Countercyclical Capital Buffer: The Case of Uruguay," Monetaria, Centro de Estudios Monetarios Latinoamericanos, CEMLA, vol. 0(2), pages 251-285, July-Dece.
    4. International Monetary Fund, 2017. "Panama: Selected Issues," IMF Staff Country Reports 2017/106, International Monetary Fund.
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    6. Richard Simper & Maximilian J.B. Hall & Wenbin B. Liu & Valentin Zelenyuk & Zhongbao Zhou, 2014. "How Relevant is the Choice of Risk Management Control Variable to Non-parametric Bank Profit Efficiency Analysis?," CEPA Working Papers Series WP122014, School of Economics, University of Queensland, Australia.
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    11. Jan FRAIT & Zlatuše KOMÁRKOVÁ, 2013. "Loan Loss Provisioning in Selected European Banking Sectors: Do Banks Really Behave in a Procyclical Way?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(4), pages 308-326, August.
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    13. Bholat, David & Lastra, Rosa & Markose, Sheri & Miglionico, Andrea & Sen, Kallol, 2016. "Non-performing loans: regulatory and accounting treatments of assets," Bank of England working papers 594, Bank of England.
    14. Malovaná Simona & Tesařová Žaneta, 2022. "Banks’ Credit Losses and Provisioning over the Business Cycle: Implications for IFRS," Review of Economic Perspectives, Sciendo, vol. 22(1), pages 53-74, March.
    15. Safarzadeh Bandari , Mohammad Hosein & Jafarimanesh , Ibrahim, 2019. "Examination of Loan Loss provision Model of Iranian Banks from Managerial Discretion Perspective," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 14(2), pages 255-276, April.
    16. Elnahass, Marwa & Izzeldin, Marwan & Steele, Gerald, 2018. "Capital and Earnings Management: Evidence from Alternative Banking Business Models," The International Journal of Accounting, Elsevier, vol. 53(1), pages 20-32.
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    18. Lilit Popoyan, 2020. "Macroprudential Policy: a Blessing or a Curse?," Review of Economics and Institutions, Università di Perugia, vol. 11(1-2).

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