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A profit-to-provisioning approach to setting the countercyclical capital buffer

Lukáš Pfeifer and Martin Hodula

Economic Systems, 2021, vol. 45, issue 1

Abstract: In this paper, we propose a new profit-to-provisioning approach that can be used in the macroprudential decision-making process. We construct new Banking Prudence Indicators (BPI) that largely capture the risk of cyclicality of profit and loan loss provisions and should monitor the forward-looking ability of the expected credit loss approach under International Financial Reporting Standard 9. We evaluate the performance of our newly proposed BPIs using two econometric exercises. Overall, they exhibit good statistical properties, are relevant to the countercyclical capital buffer decision-making process, and might contribute to a more precise assessment of both systemic risk accumulation and risk materialization.

Keywords: Banks; Countercyclical capital buffer; Financial stability; Macroprudential policy; Provisions; Vulnerability indicators (search for similar items in EconPapers)
JEL-codes: E58 G21 G28 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.ecosys.2021.100853

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