Research On Provision For Loan Losses System Of Commercial Bank In China

The global financial crisis initiated by the American subprime mortgage crisis has caused serious impacts and huge losses to the banking industry as the main body of the whole financial system. Although the occasion for this financial crisis is the abuse of financial derivatives by banking, lack of supervision of the banking supervision departments can not be ignored either. Since loan loss provision is an important indicator to reflect the quality of bank loans, developing a perfect system of loan loss provisions will be conducive to implement effective supervision which may ensure the safety of the global financial system and avoid another credit crunch.The loan loss provisions system of commercial bank is based on the theories of risk management and financial accounting, which demands the commercial banks extract the provisions from current profits and losses to against the risk of the future loan losses. Entering the post-crisis period, in order to alleviate the procyclicality problems that brought about by the traditional system of loan loss provisions, the both sides of the system of international norms of loan loss provisions, Basel Committee on Banking Supervision and the International Accounting Standards Board, have proposed the direction of reform to establish the forward-looking system of loan loss provisions.The present system of loan loss provisions is under parallel regulations in China, which means the accounting standards and regulatory rules implement at the same time. Compared with other countries loan loss provision system, this system has distinct Chinese characteristics. In July2011, the China Banking Regulatory Commission proposed to establish China’s dynamic provisioning system in order to strengthen the prudential supervision of the loan loss provisions and conform with the trend of the reforming international loan loss provision system. Overall, the system has fully considered the actual situation of China. This forward-looking system has strong operability and adaptability and also reflects the dynamic provisioning thinking simultaneously. However, in the respect of the system itself and the implementation effect, there are still many limitations. This paper analyses the present dynamic provisioning system in China, and puts forward countermeasures and suggestions to improve the system of loan loss provisions.