Dynamic Loan Loss Provisioning: Simulations on Effectiveness and Guide to Implementation

International Monetary Fund Working Paper No. 12/110

59 Pages Posted: 12 May 2012

See all articles by Torsten Wezel

Torsten Wezel

International Monetary Fund (IMF)

Jorge A. Chan-Lau

International Monetary Fund (IMF) - International Capital Markets Department

Francesco Columba

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2012

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.

Keywords: Dynamic Provisioning, procyclicality, macroprudential policy, Latin America

JEL Classification: G21, G28

Suggested Citation

Wezel, Torsten and Chan-Lau, Jorge Antonio and Columba, Francesco, Dynamic Loan Loss Provisioning: Simulations on Effectiveness and Guide to Implementation (May 1, 2012). International Monetary Fund Working Paper No. 12/110, Available at SSRN: https://ssrn.com/abstract=2055716 or http://dx.doi.org/10.2139/ssrn.2055716

Torsten Wezel (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States
2026237399 (Phone)

Jorge Antonio Chan-Lau

International Monetary Fund (IMF) - International Capital Markets Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Francesco Columba

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy
+39-06-47922131 (Phone)
+39-09-47923611 (Fax)

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