Regulatory and Tax Treatment of Loan Loss Provisions

Claudia Dziobek

No 1996/006, IMF Policy Discussion Papers from International Monetary Fund

Abstract: Provisioning for loan losses is a method for recognizing the reduction in the value of a hank’s loan portfolio. Provisions are an essential element of prudential risk management and capital adequacy measurement and an important market signal. Loan loss provisions constitute a normal operating expense and should be deducted from taxable income provided that banks adhere to consistent and strictly enforced provisioning procedures, and provided that these mirror loan default probabilities. The argument for harmonized regulatory and tax treatment of loan loss provisions can be based on the economic similarity between loan losses and depreciation of machines and equipment. Tax deductibility of loan loss provisions does not imply a tax deferral or a special subsidy for banks.

Keywords: PDP; loan; provision; tax treatment; classified loan; tax; loan classification system; loss allowance; loan portfolio; performance mandate; valuation procedure; loan contract; loan quality; loss-making bank; country loan; loan write-off; bank regulator; tax deductibility; Loan loss provisions; Loans; Distressed assets; Income; Non-wage benefits; Central and Eastern Europe; Global (search for similar items in EconPapers)
Pages: 29
Date: 1996-06-01
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Citations: View citations in EconPapers (5)

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