Dynamic Provisioning: A Countercyclical Tool for Loan Loss Reserves

FRB Richmond Economic Quarterly, vol. 95, no. 4, Fall 2009, pp. 383-418

36 Pages Posted: 14 Dec 2012

See all articles by Eliana Balla

Eliana Balla

Quantitative Supervision & Research - Federal Reserve Bank of Richmond

Andrew B. McKenna

Independent

Date Written: 2009

Abstract

In the wake of the financial crisis of 2007–2009, as various banking policymakers revisit loan loss provisioning rules, the Spanish approach of dynamic provisioning has garnered attention as a potential alternative to the current incurred loss approach. We review the current approach to loan loss reserves in the United States, focusing on how loan loss reserves relate to bank solvency and why the current accounting approach may have procyclical effects. We present a conceptual framework to compare loan loss provisioning under the incurred loss framework and dynamic provisioning. Then we simulate dynamic provisioning with U.S. data to present an empirical comparison.

Suggested Citation

Balla, Eliana and McKenna, Andrew B., Dynamic Provisioning: A Countercyclical Tool for Loan Loss Reserves (2009). FRB Richmond Economic Quarterly, vol. 95, no. 4, Fall 2009, pp. 383-418, Available at SSRN: https://ssrn.com/abstract=2188481

Eliana Balla (Contact Author)

Quantitative Supervision & Research - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Andrew B. McKenna

Independent ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
325
Abstract Views
1,971
Rank
177,219
PlumX Metrics