Dynamic Loan Loss Provisioning: Simulationson Effectiveness and Guide to Implementation

Torsten Wezel, Jorge Chan-Lau and Francesco Columba

No 2012/110, IMF Working Papers from International Monetary Fund

Abstract: This simulation-based paper investigates the impact of different methods of dynamic provisioning on bank soundness and shows that this increasingly popular macroprudential tool can smooth provisioning costs over the credit cycle and lower banks’ probability of default. In addition, the paper offers an in-depth guide to implementation that addresses pertinent issues related to data requirements, calibration and safeguards as well as accounting, disclosure and tax treatment. It also discusses the interaction of dynamic provisioning with other macroprudential instruments such as countercyclical capital.

Keywords: WP; DP fund; loan loss; DP rate; DP system; loan portfolio; Dynamic Provisioining; Procyclicality; Macroprudential Policy; Latin America; DP buffer; Peruvian DP formula; income statement; DP system great care; recording DP; DP path; DP concept; DP parameter; profit and loss statement; Loans; Credit cycles; Countercyclical capital buffers; Credit; Basel II; Global (search for similar items in EconPapers)
Pages: 59
Date: 2012-05-01
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Citations: View citations in EconPapers (20)

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