Bank loan-loss provisioning, central bank rules vs. estimation: The case of Portugal

Dermine, Jean; Carvalho, Cristina Neto de

doi:10.1016/j.jfs.2007.12.001

Cited by 10 publications

(5 citation statements)

References 32 publications

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“…The obtained supplement curve of unexpected loss should have increasing monotonicity in order to make economic sense. Therefore, an adjustment is implemented on the methodology proposed in the already referred working paper [10], thus, ensuring an additional layer of conservatism for the overall approach. The monotonicity is achieved by redefining the add-on, as indicated below.…”

Section: Lgd In-default Modelmentioning

confidence: 99%

“…Kim [6], based on the one factor models from Frye [7] and on the proposal given by Düllmann and Trapp [8], presents several approaches to obtain the LGD in-default and ELBE for small samples with insufficient historical depth. Dermine and de Carvalho [9,10] estimates the consequences of defaulting using two different approaches. The first approach follows the proposal from Altman [11] and Altman and Suggit [12] where the percentage of good and bad loans is analyzed after a number of years after the origination date.…”

Section: Introductionmentioning

confidence: 99%

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Regulatory Estimates for Defaulted Exposures: A Case Study of Spanish Mortgages

2021

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The capital requirements derived from the Basel Accord were issued with the purpose of deploying a transnational regulatory framework. Further regulatory developments on risk measurement is included across several documents published both by the European Banking Authority and the European Central Bank. Among others, the referred additional documentation focused on the models’ estimation and calibration for credit risk measurement purposes, especially the Advanced Internal-Ratings Based models, which may be estimated both for non-defaulted and defaulted assets. A concrete proposal of the referred defaulted exposures models, namely the Expected Loss Best Estimate (ELBE) and the Loss Given Default (LGD) in-default, is presented. The proposed methodology is eventually calibrated on the basis of data from the mortgage’s portfolios of the six largest financial institutions in Spain. The outcome allows for a comparison of the risk profile particularities attached to each of the referred portfolios. Eventually, the economic sense of the results is analyzed.

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Section: Lgd In-default Modelmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Regulatory Estimates for Defaulted Exposures: A Case Study of Spanish Mortgages

2021

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“…This strand of the banking literature finds that bank characteristics and business cycles are important determinants of loss rates. Dermine and De Carvalho (2008) estimate dynamic provisions for non-performing loans of Portuguese banks over time. Other prior studies analyse the determinants of loan loss provisions using banks' financial ratios and economic factors both in the US and abroad.…”

Section: Prediction Of Banks' Credit Losses and Their Interactionsmentioning

confidence: 99%

The value of bank capital buffers in maintaining financial system resilience

Bui

Scheule

2017

Journal of Financial Stability

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There is a current controversy concerning the appropriate size of banks' capital requirements, and the trade-off between the costs and benefits of implementing higher capital requirements. We quantify the size of capital buffers required to reduce system-wide losses using confidential regulatory data for Australian banks from 2002 to 2014 and annual public accounts from 1978 to 2014. We find that a moderate increase in bank capital buffers is sufficient to maintain financial system resilience, even after taking economic downturns into consideration. Furthermore, while banks benefit from paying a lower cost of debt when they have a higher capital buffer, lending volumes are lower indicating that credit supply may be hampered if bank capital levels are too high within a financial system.

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“…If capital requirements have to face the only unexpected losses, provisioning policies can reduce their pro-cyclicality, since banks would increase loan loss reserves by making more provisions during an economic expansion, while they would draw from these reserves when the credit losses amount gets higher, as economic conditions deteriorate. This mechanism lies at the basis of the so called "dynamic" provisioning currently adopted in Spain (Pérez et al, 2008;Fern andez de Lis et al, 2000; see also Dermine and Neto de Carvalho, 2008, for an analysis of the peculiar provisioning schedule imposed by the central bank of Portugal). On the contrary, if capital requirements are intended to cover also the expected loss, pro-cyclicality stretches to the provisions as well (see Bouvatier and Lepetit, 2012, for a study showing how in a forward-looking provisioning system, where statistical provisions are used to smooth the evolution of total LLPs, the issue of pro-cyclicality of loan market fluctuations does not exist).…”

Section: Introductionmentioning

confidence: 99%

Determinants of banks’ provisioning policies during the crisis

et al. 2014

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Purpose – The purpose of this paper is to investigate the discretionary use of loan loss provisions in the Chinese banking sector during the global financial crisis. The objective of this paper is twofold: to add new evidence to the scant literature dealing with a peculiar banking sector, such as the Chinese one, and to shed more light on banks’ provisioning behaviour during stressed financial markets conditions. Design/methodology/approach – Using bank-level balance sheet and financial statements data, the authors test for income smoothing and capital management hypotheses, and detect differences in provisioning decisions of listed banks and unlisted financial intermediaries during turbulent financial markets conditions. Findings – The authors find support for the income smoothing hypothesis, but not for the capital management one. Chinese listed banks appear to be less risky and less involved in income smoothing to shift their risk, when compared to unlisted credit institutions. Social implications – The results obtained from this paper help to understand the functioning of bank provisioning regime in the Chinese banking system and how provisioning mechanisms can address the issues associated with the pro-cyclicality of bank capital requirements. Originality/value – Though referred to a particular banking sector, such as the Chinese one, the results of this paper can provide a tremendous incentive to those national and international authorities that are bound to promote forward-looking provisioning practices. These practices would allow banks to build a buffer of reserves to face the downward pressure on earnings and capital associated with periods of worsening credit quality.

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Bank loan-loss provisioning, central bank rules vs. estimation: The case of Portugal

Cited by 10 publications

References 32 publications

Regulatory Estimates for Defaulted Exposures: A Case Study of Spanish Mortgages

Regulatory Estimates for Defaulted Exposures: A Case Study of Spanish Mortgages

The value of bank capital buffers in maintaining financial system resilience

Determinants of banks’ provisioning policies during the crisis

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