China’s Commercial Banks’ Dynamic Provisioning System And Policy Research

Since global financial crisis of2008,risks faced by the banks continue to be exposed,so strengthening on the commercial banks’ risks control capabilities and risks management is an urgent need to strengthen the development and improvement of the macroeconomic stable operation for the financial sector.Also it will become an important tool to deepen reform and improve capacity for the banks’sustainable development. The extraction of the commercial banks’ risk provisions is derived from the banks’risk management and control capabilities.It is an important way for banks to prevent risks,and it has substantially the same function with the capital.Whether science provision on the one hand affects banks’ capital adequacy and stability, on the other hand affects the ability of the banking against a variety of financial risks.After the financial crisis,the countries of world begin to re-survey and put more emphasis on loan loss provisions,they put forward higher requires of loan loss constantly to guarantee sound operation of banks and the stability of financial system.Loan loss provisions which are estimated the loan loss of bank to prevent the risk of loan,are premise of sound operation of banks.Under current accounting on accrual basis,the identification and measurement of the loan losses should be only comfirmed after the fact’s occurrence of the loan.Typically in a good time,banks consider future credit risk is small,and it will enlarge the size of credit,but the economic recession will make the deterioration of credit quality in a short time,at the same time,this will focus on the occurrence of a credit default,the reserves for bank’s loan losses need to grow during the recession.The financial crisis in some extent have exposed the pro-cyclical defects of financial supervision system,how to eliminate these pro-cyclical defects becomes an important part of the reform of banking supervision.After the financial crisis,the discussions on international banking regulatory reform are also underway,including the using of dynamic provisioning instead of an accrual method of provision.Since banks were allowed to take the earlier detection and coverage of credit losses in loan portfolios,dynamic provisioning makes banks to set up a buffer cushion in the economic upswing which can be used in the economic downturn.The counter-cyclical nature of the system not only improves the anti-risk ability of individual banks,but also enhances the resilience of the entire banking system.Therefore dynamic provisioning will become an important tool to achieve macro-prudential supervision department goals.Our dynamic provisioning was introduced in2011,but it is still in a preliminary stage,we need to refine and improve all aspects.Based on the reference commercial bank capital management theory,risk management theory and the theory of macro-prudential supervision. we use the data of16listed commercial banks to make a regressive analysis for the period2008-2012,and put an empirical test on a question about the pro-cyclical of loan loss provision,but also we analyse the factors that affect loan loss provision.The results show that our current system of loan loss provisions have pro-cyclical,the impact of non-performing loan ratio and return on assets on loan loss provision is significantly positive, but the impact of board size, independent director proportion and shareholder attributes on loan loss reserve is not significant.Meanwhile,this paper compares with the dynamic provisioning in Spain,Uruguay and other countries,we analysis the effects on the economic cycle.Studies have shown that although the action of dynamic provisioning system which roles in bank credit growth is limited, but it can significantly increase the risks of the buffering capacity of the banking system.After considering the actual combination of the study,we provide a reference model of dynamic provisioning for China.Through the data of the five domestic state-owned banks and joint-stock commercial banks in the period2005-2012,we make out simulation analysis with comparing the theoretical and actual values,and find that provisions have been made more in the good time, but in the economic downturn there is also more preparation.So finally we give some suggestions on how to improve the dynamic provision system.