Bank Loan-Loss Provisioning, Methodology and Application

Dermine, Jean; Neto de Carvalho, Cristina

doi:10.2139/ssrn.533104

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Bank Loan-Loss Provisioning, Methodology and Application

36 Pages Posted: 21 Apr 2004

See all articles by Jean Dermine

Cristina Neto de Carvalho

Catholic University of Portugal (UCP) - Department Economics and Finance

Date Written: April 2004

Abstract

A fair level of provisions on bad and doubtful loans is an essential input in mark-to-market accounting, and in the calculation of bank capital and solvency. Few academic studies have analyzed the adequacy of loan-loss provisioning because, due to the private nature of bank loan transactions, few micro data are readily available. Access to data on recovery over time on bad and doubtful bank loans allows developing and applying two methodologies to calculate a fair level of loan-loss provisions. Empirical estimates are then compared to a regulatory provisioning schedule imposed by a central bank.

Keywords: banking, bank regulation, bank accounting

JEL Classification: G21, G28, M41

Suggested Citation: Suggested Citation

Dermine, Jean and Neto de Carvalho, Cristina, Bank Loan-Loss Provisioning, Methodology and Application (April 2004). Available at SSRN: https://ssrn.com/abstract=533104 or http://dx.doi.org/10.2139/ssrn.533104