Effects of Loan Loss Provisions on Growth in Bank Lending: Some International Comparisons

Abstract

A dynamic provisioning system is one of the instruments that regulators could use for introducing counter-cyclicality into prudential regulation. The potential effectiveness of such instrument depends on how far actual backward-looking provisioning practices exacerbate growth in bank lending. We therefore investigate whether backward-looking provisioning practices amplify growth in bank lending and, if such an effect exists, whether there are differences in its magnitude across countries. Our results show that backward backward-looking provisioning systems exacerbate banks' lending fluctuations in both developed and emerging countries, but with a stronger impact for emerging countries. These results support the idea that countercyclical tools based on capital buffers might not be sufficient to dampen the cyclicality of bank lending, especially in emerging countries, and the implementation of a forward-looking provisioning system might be an important mandate.