Journal of Financial Stability Vol. 8 No. 1 2012
Provisioning rules and bank lending: A theoretical model
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.
- DOI
- 10.1016/j.jfs.2011.04.001
- Volume
- 8
- Issue
- 1
- Pages
- 25-31
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib