Loan Loss Provisioning Rules, Procyclicality, and Financial Volatility

Pierre-Richard Agénor and Roy Zilberman

Journal of Banking & Finance, 2015, vol. 61, issue C, 301-315

Abstract: Interactions between loan-loss provisioning regimes and business cycle fluctuations are studied in a dynamic stochastic general equilibrium model with credit market imperfections. With a specific provisioning system, provisions are triggered by past due payments. With a dynamic system, both past due payments and expected losses over the whole business cycle are accounted for, and provisions are smoothed over the cycle. Numerical experiments with a parameterized version of the model show that a dynamic provisioning regime can be highly effective in mitigating procyclicality of the financial system. The results also indicate that the combination of a credit gap-augmented Taylor rule and a dynamic provisioning system with full smoothing may be the most effective way to mitigate real and financial volatility associated with financial shocks.

Keywords: Loan-loss provisioning systems; DSGE models; Financial volatility (search for similar items in EconPapers)
JEL-codes: E31 E44 E52 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (35)

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Working Paper: Loan Loss Provisioning Rules, Procyclicality, and Financial Volatility (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:61:y:2015:i:c:p:301-315

DOI: 10.1016/j.jbankfin.2015.08.035

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