Provisioning rules and bank lending : A theoretical model

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 provisionin...

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Bibliographic Details
Published in:Journal of financial stability 2012, Vol.8 (2), p.25-31
Main Authors: Bouvatier, Vincent, Lepetit, Laetitia
Format: Article
Language:English
Subjects:
Economics and Finance
Humanities and Social Sciences
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Summary: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 findings support the call for the implementation of a dynamic provisioning system.
ISSN:1572-3089
DOI:10.2139/ssrn.1148314