Research On Provision System Against Risk In Commercial Bank

Provision system against risk of commercial bank means that the commercial banks establish a system to resist the potential future losses of assets which extracts reserves from the current gains. This system is based on the theory of financial accounting and theory of risk management in commercial banks, which to reflect the true quality of assets of commercial banks and ensure the sound operation of commercial banks.Provision system against risk of commercial bank in our country began in 1988, in which year the Ministry of Finance Promulgated a document" temporary regulations on the national professional banks establishing reserves of loan losses ".The system was subsequently set aside from the provision meaning, the types of provisions and methods of provision, and have a relatively sound development. But in the process of development, the system will inevitably have some flaws. For the system itself, there are some inconsistencies between policies, description in the document is ambiguous, types for impairment of assets are unreasonable, and there are blank spots in the Provision system against risk. For the operable of the system, the discounted cash flow method and classification for financial assets according to the purpose have some difficulties. So this paper present several recommendations as follows: first for the extraction system, on one side we should detail terms of the system and clear out the extraction scope, On the other side we should formulate transition-period policy to ensure application of the discounted cash flow method, and then plus use way of the provision. Second for the tax revenue about provision, the policy should permit deduct tax revenue about provision for losses of assets and should proceed in an orderly way to avoid impact for the tax. But for general provision should not permit any deduction about the tax. Third for the operable of the system, we should coordinate various policies in different departments and standard behaviors of commercial bank, then strengthen management to the information announcement about commercial bank. In the future, on the one hand we should explore dynamic provision system, perfect information price market and the property appraised system as well as cancelling the bad debt system. On the other hand we should train staff in commercial banks, explore Internal Ratings Based Approach about commercial banks, coordinate functions of different departments in commercial banks. All of these recommendations can ensure the establishment of Provision system against risk of commercial banks and validity of this system.