Cyclically Adjusted Provisions and Financial Stability

60 Pages Posted: 25 Apr 2017

See all articles by Pierre-Richard Agenor

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Luiz A. Pereira da Silva

Bank for International Settlements (BIS)

Date Written: May 2016

Abstract

This paper studies the extent to which alternative loan loss provisioning regimes affect the procyclicality of the financial system and financial stability. It uses a DSGE model with financial frictions (namely, balance sheet and collateral effects, as well as economies of scope in banking) and a generic formulation of provisioning regimes. Numerical experiments with a parameterized version of the model show that cyclically adjusted (or, more commonly called, dynamic) provisioning can be highly effective in terms of mitigating procyclicality and financial instability, measured in terms of the volatility of the credit-output ratio and real house prices, in response to financial shocks. The optimal combination of simple cyclically adjusted provisioning and countercyclical reserve requirements rules is also studied. The simultaneous use of these instruments does not improve the ability of either one of them to mitigate financial instability, making them partial substitutes rather than complements.

Keywords: Provisioning regimes, Reserve requirements, DSGE models

JEL Classification: E32, E44, E52

Suggested Citation

Agenor, Pierre-Richard and Pereira da Silva, Luiz A., Cyclically Adjusted Provisions and Financial Stability (May 2016). IDB Working Paper No. IDB-WP-656. Available at SSRN: https://ssrn.com/abstract=2956682 or http://dx.doi.org/10.2139/ssrn.2956682

Pierre-Richard Agenor (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

Luiz A. Pereira da Silva

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/luiz_awazu_pereira_da_silva.htm

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