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
Date Written: January 19, 2016
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: Suggested Citation