Dynamic provisioning: rationale, functioning, and prudential treatment

Marco Burroni (marco.burroni@bancaditalia.it), Mario Quagliariello, Emiliano Sabatini (emiliano.sabatini@bancaditalia.it) and Vincenzo Tola (vincenzo.tola@bancaditalia.it)
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Marco Burroni: Banca d'Italia
Emiliano Sabatini: Banca d'Italia
Vincenzo Tola: Banca d'Italia

No 57, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Current policy debate has renewed interest in countercyclical provisioning policies; dynamic provisions are regarded as a valuable device for pursuing this goal. Last July, Ecofin supported "the introduction of forward-looking provisioning, which consists in constituting provisions deducted from profits in good times for expected losses on loan portfolios, and which would contribute to limiting procyclicality". This paper describes: i) how dynamic provisions work in a general framework based on expected losses; ii) how they work according to the Spanish system, which is the only real example of countercyclical provisioning; iii) the differences and similarities between the expected loss model and the Spanish approach. Building on proposals currently under discussion in the international community, it also suggests a possible way forward for introducing a system of dynamic provisions that, while meeting the prudential goal of having more conservative provisioning policies, would not clash with accounting standards.

Keywords: dynamic provisions; capital buffers; Basel 2; credit risk; procyclicality (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2009-11
New Economics Papers: this item is included in nep-acc and nep-reg
References: View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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