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
Date Written: May 1, 2012
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: Suggested Citation