Provisioning rules and bank lending: A theoretical model

Vincent Bouvatier and Laetitia Lepetit

Journal of Financial Stability, 2012, vol. 8, issue 1, 25-31

Abstract: This paper develops a partial equilibrium model of a banking firm to analyze how provisioning rules influence loan market fluctuations. We show that a backward-looking provisioning system amplifies the pro-cyclicality of loan market fluctuations. We demonstrate that, in a forward-looking provisioning system where statistical provisions are used to smooth the evolution of total loan loss provisions, the issue of pro-cyclicality of loan market fluctuations does not exist. Our results support the recent call of the Basel Committee for the implementation of a forward-looking provisioning system to address procyclicality.

Keywords: Loan market; Provisioning system; Pro-cyclicality (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (54)

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Working Paper: Provisioning rules and bank lending: A theoretical model (2012)
Working Paper: Provisioning rules and bank lending: A theoretical model (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:8:y:2012:i:1:p:25-31

DOI: 10.1016/j.jfs.2011.04.001

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