Commercial Bank Loan Loss Provisions Procyclicality Research

Loan loss provision is reserve based on an assessment of the bank’s loan losses, thefirst important line against the risk of bank loan losses, it is important for the soundoperation of banks. Loan loss provision itself has pro-cyclical, reducing when theeconomic upward, increasing during the economic downturn. Since the subprime mortgagecrisis, the international community gradually changing regulatory philosophy, taking theuse of combining system of macro-prudential and micro-prudential supervision, and in themacro-prudential basis, strengthen counter-cyclical regulation starting from the timedimension, easing the procyclicality of loan loss provisions, even of the whole financialsystem.This paper analyze the procyclicality of China’s commercial banks’ loan lossprovisions from two perspectives.On the one hand, Using two indicators, provisioncoverage and the ratio of the loan loss provision, we analyze China’s commercial banksloan losses and pro-cyclical status from a financial perspective. On the other hand,referring to empirical research model abroad, Through analyzing the data of commercialbanks’ loan loss provision between2004and2012, focusing on the relationship betweenbank loan loss provisions and GDP with total profits, we obtained the result that loan lossprovision for China’s commercial banks have pro-cyclical and smoothing effect of income.The topic of the article is to discuss the loan loss provision for Chinese commercial banksand analyze the pro-cyclical, hoping to establish a dynamic provision system for thecommercial banks and providing some implementation of the proposed regulation toimprove bank loan loss reserves.