Loan loss provisioning rules, procyclicality and financial volatility

Agénor, Pierre-Richard and Zilberman, Roy (2015) Loan loss provisioning rules, procyclicality and financial volatility. Journal of Banking and Finance, 61 (C). pp. 301-315. ISSN 0378-4266

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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.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Banking and Finance
Additional Information:
This is the author’s version of a work that was accepted for publication in Journal of Banking and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Banking and Finance, 61, 2015 DOI: 10.1016/j.jbankfin.2015.08.035
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/2000/2002
Subjects:
ID Code:
76469
Deposited By:
Deposited On:
03 Nov 2015 19:54
Refereed?:
Yes
Published?:
Published
Last Modified:
14 Jul 2020 04:44