Research On Commercial Bank Dynamic Provisioning

Loan loss provision, as the most important part of provision system ofcommercial bank, is one of the most important tools for banks to prevent risks fromhappening. The extraction of loan loss provision is derived from the needs of banks’risk management and control. Due to the current accounting standards (accrualprinciple), tax rules and less consider of economic cycle of risk measurement methods,banks extract much less in the period of economic prosperity, while extract muchmore for the emerging of loan loss during the recession, affecting the real economythrough various channels, further amplifying the cyclical fluctuations in the financialsystem. Therefore, establishing dynamic provisioning not only improves the banks’ability to resist risks, but also makes the whole macroeconomic more stable becausebanks extract more provisions during the boom years which can cover the loan loss ofrecession.Based on the analysis of relevant theory and comparative study of the currentdynamic provision practices of Spain and other counties, combining with thedevelopment history of China’s loan loss provision system, this paper empirically teststhe pro-cyclicality of loan loss provision of China’s commercial banks by using thedata of16listed commercial banks during2003-2012. The test shows that, the threeindicators, GDP growth rate, inflation rate and capital adequacy ratio, reflect differentlevels of pro-cyclicality of loan loss provision, while the indicator of loan growth ratealleviated this feature within a limited extent. In addition, there is no significantevidence shows that commercial banks use loan loss provision to smooth income, sothe pro-cyclicality of loan loss provision is stronger than expected. At last, this paperput forward some corresponding suggestions to speed up the construction of dynamicprovisioning system of China’s commercial banks. The suggestions includecoordinating inherent conflict of accounting standards and regulatory policies,implementing strictly unified management system, improving five category loanclassifications, strengthening the supervision of non-standard assets of banks, encouraging banks extract provisions by tax policy, establishing database of loan lossand improving information disclosure system.