Effect of the Basel Accord Capital Requirements on the Loan-Loss Provisioning Practices of Australian Banks

36 Pages Posted: 16 Feb 2014 Last revised: 4 Feb 2016

See all articles by James R. Cummings

James R. Cummings

University of Sydney; Centre for International Finance and Regulation (CIFR)

Kassim Jahn Durrani

Macquarie University, Macquarie Business School; The University of Sydney

Date Written: January 19, 2016

Abstract

There are two distinct regimes for bank provisioning in Australia: a forward-looking model for regulatory purposes and an incurred loss model for financial reporting. This study examines the former using a unique but confidential database. We find evidence that: (i) banks increase provisions in anticipation of future lending growth, (ii) banks allocate part of surplus capital above regulatory requirements to pre-fund future credit losses through provisions, and (iii) banks allocate part of higher earnings for the same purpose. These results suggest that bank managers use their discretion in setting provisions to dampen the impact of fluctuations in credit market conditions on their lending activities. For internal ratings-based banks, results suggest that the revised Basel framework allowing these banks to estimate expected losses using their own credit risk models may come at a cost of reduced general provisions.

Keywords: Commercial banks, Bank regulation, Loan-loss provisions, Bank capital requirements

JEL Classification: G21, G28

Suggested Citation

Cummings, James R. and Durrani, Kassim Jahn, Effect of the Basel Accord Capital Requirements on the Loan-Loss Provisioning Practices of Australian Banks (January 19, 2016). Asian Finance Association (AsianFA) 2014 Conference Paper; 27th Australasian Finance and Banking Conference 2014 Paper; CIFR Paper No. 026/2014. Available at SSRN: https://ssrn.com/abstract=2396384 or http://dx.doi.org/10.2139/ssrn.2396384

James R. Cummings (Contact Author)

University of Sydney ( email )

Room 420 Codrington Building H69
University of Sydney, NSW 2006
Australia

HOME PAGE: http://www.sydney.edu.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Kassim Jahn Durrani

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

The University of Sydney ( email )

University of Sydney
Sydney, NC NSW 2006
Australia

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