Provisioning Rules and Bank Lending: A Theoretical Model
Journal of Financial Stability, 8(2), pp 25-31, 2012
Posted: 25 Jun 2008 Last revised: 22 Mar 2014
Date Written: July 2, 2012
This paper develops a partial equilibrium model of a banking firm to analyze how provisioning rules influence loan market fluctuations. We show that a backward-looking provisioning system amplifies the pro-cyclicality of loan market fluctuations. We demonstrate that, in a forward-looking provisioning system where statistical provisions are used to smooth the evolution of total loan loss provisions, the issue of pro-cyclicality of loan market fluctuations does not exist. Our results support the recent call of the Basel Committee for the implementation of a forward-looking provisioning system to address procyclicality.
Keywords: loan market, provisioning system, pro-cyclicality
JEL Classification: G21
Suggested Citation: Suggested Citation