Cyclically Adjusted Provisions and Financial Stability

Pierre-Richard Agénor and Luiz Awazu Pereira da Silva ()

No 7619, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: This paper studies the extent to which alternative loan loss provisioning regimes affect the procyclicality of the financial system and financial stability. It uses a DSGE model with financial frictions (namely, balance sheet and collateral effects, as well as economies of scope in banking) and a generic formulation of provisioning regimes. Numerical experiments with a parameterized version of the model show that cyclically adjusted (or, more commonly called, dynamic) provisioning can be highly effective in terms of mitigating procyclicality and financial instability, measured in terms of the volatility of the credit-output ratio and real house prices, in response to financial shocks. The optimal combination of simple cyclically adjusted provisioning and countercyclical reserve requirements rules is also studied. The simultaneous use of these instruments does not improve the ability of either one of them to mitigate financial instability, making them partial substitutes rather than complements.

Keywords: Financial Frictions; Loan Loss Reserves; Financial Systems; Loan loss provisions; Financial Stability (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 (search for similar items in EconPapers)
Date: 2016-05
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Cyclically adjusted provisions and financial stability (2017)
Working Paper: Cyclically Adjusted Provisions and Financial Stability (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:7619

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