Research On The Method And Appropriateness Of Dynamic Provisioning Method For Chinese Commercial Banks

The financial crisis beginning from2008has incurred enormous study on the pro-cyclicality issues of financial system, especially on commercial banks. Among the different reasons causing the pro-cyclicality problem, loan loss provisions is an important one. Although the initial object of loan loss provisioning is to prevent for the probable loan loss risks, the method used in practice has encountered some problems. In good times, the bank enjoys low default risk and tends to provision less, while in band times, the bank is willing to provision more to deal with the rising default affaires. And that is the mechanism leading to the pro-cyclicality.In order to solve the pro-cyclicality problem, dynamic provisioning policy is introduced, first in Spain and now to several countries, including China, along with some problems. Based on these existing practices, this paper recognizes these problems, and introduces a new loan loss provisioning rule, with the characteristics of forward-looking and dynamics. Then this paper compares the result calculated from the model and the regulatory authority’s requirement and the real quantity of the bank system during2002-2012. Form the comparison, this paper finds that the supervisor requirement is relatively higher than proper level. And this can lead to some other problem, such as reducing the bank’s intention to provide enough loans because of cost rising, and mis-reporting of financial information, which can enlarge the whole risk level meeting the bank system.At last, this paper provides some policy instinct to the regulatory authority. There should be a demarcation line between loan loss provision and bank capital in the management of loan loss risks. The supervisor should constantly revise the loan loss requirement when more practical data is available.