Dynamic Loan Loss Provisions in Uruguay: Properties, Shock Absorption Capacity and Simulations Using Alternative Formulas

23 Pages Posted: 3 Jun 2010

See all articles by Torsten Wezel

Torsten Wezel

International Monetary Fund (IMF)

Date Written: May 2010

Abstract

This paper assesses the merits of countercyclical loan loss provisioning in Uruguay. Using a stress test methodology, it quantifies the protection against macroeconomic shocks provided by the stock of dynamic provisions accumulated since 2001 and finds that medium-sized shocks would be fully absorbed, offsetting the additional costs caused by rising specific provisions. In addition, the paper simulates the path of dynamic provisions under the formulas used in Spain, Peru and Bolivia, showing that the alternative paths diverge significantly from the actual buildup and in part better conform to the Uruguayan credit cycle.

Keywords: Banks, Business cycles, Credit risk, Economic models, Latin America, Loans, Uruguay

Suggested Citation

Wezel, Torsten, Dynamic Loan Loss Provisions in Uruguay: Properties, Shock Absorption Capacity and Simulations Using Alternative Formulas (May 2010). IMF Working Paper No. 10/125, Available at SSRN: https://ssrn.com/abstract=1617024

Torsten Wezel (Contact Author)

International Monetary Fund (IMF) ( email )

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2026237399 (Phone)

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