Dynamic Provisioning: Rationale, Functioning, and Prudential Treatment

30 Pages Posted: 5 Jan 2010

See all articles by Marco Burroni

Marco Burroni

Bank of Italy

Mario Quagliariello

European Central Bank (ECB)

Emiliano Sabatini

Bank of Italy

Vincenzo Tola

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2009

Abstract

Current policy debate has renewed interest in counter-cyclical provisioning policies; dynamic provisions are regarded as a valuable device for pursuing this goal. Last July, Ecofin supported "the introduction of forward-looking provisioning, which consists in constituting provisions deducted from profits in good times for expected losses on loan portfolios, and which would contribute to limiting procyclicality". This paper describes: i) How dynamic provisions work in a general framework based on expected losses; ii) How they work according to the Spanish system, which is the only real example of countercyclical provisioning; iii) The differences and similarities between the expected loss model and the Spanish approach. Building on proposals currently under discussion in the international community, it also suggests a possible way forward for introducing a system of dynamic provisions that, while meeting the prudential goal of having more conservative provisioning policies, would not clash with accounting standards.

Keywords: dynamic provisions, capital buffers, Basel 2, credit risk, procyclicality

JEL Classification: G21, G28

Suggested Citation

Burroni, Marco and Quagliariello, Mario and Sabatini, Emiliano and Tola, Vincenzo, Dynamic Provisioning: Rationale, Functioning, and Prudential Treatment (November 1, 2009). Bank of Italy Occasional Paper No. 57, Available at SSRN: https://ssrn.com/abstract=1531323 or http://dx.doi.org/10.2139/ssrn.1531323

Marco Burroni

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Mario Quagliariello (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Emiliano Sabatini

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Vincenzo Tola

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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