International Practice Of Prospective Dynamic Provisioning And Analysis Of Application In China

The outbreak of financial crisis in 2008 gave rise to a hotly debated discussion on the pro-cyclicality of financial system among regulators of many countries. It is generally believed that there four main reasons leading to pro-cyclicality of financial system: risk-based regulatory requirements, LLP drawing framework based on occurred loss, accounting method as per principle of fair value and remuneration of regulators for financial institutions. On this basis, regulatory authorities of many countries began to put forward a counter-cyclical financial regulatory framework, where the dynamic provisioning, as a counter-cyclical regulatory tool that can mitigate commercial banks' pro-cyclicality caused by current LLP drawing framework based on occurred loss, was brought out and received tremendous and wide attention. In international practice, Spain is one of the countries that implement dynamic provisioning quite early with rich experiences on practical operation. Spanish banks received less adverse shock than banks of other countries, which proved the advantage of dynamic provisioning again.This dissertation illustrates the pro-cyclicality mechanism of PPL based on Incurred Loss Model and counter-cyclicality mechanism of dynamic provisioning based on Expected Loss Model from theoretical perspectives. Meanwhile, on the basis of the introduction of dynamic provisioning application in countries like Spain, Columbia and so on, this paper summarizes the similarities and differences among difference cases and extracts valuable points for reference to application of dynamic provisioning in China. Moreover, this paper draws a conclusion that current LLP in China is evidently pro-cyclical by using panel data empirical model.Due to the regulation in China regarding dynamic provisioning is still vague, this dissertation puts forward a dynamic provisioning model combining experience of international practice and China's actual situation, and simulates the results of the model using quarterly data of Chinese banking industry from 2004 to 2014.Finally, this paper also designs a modified dynamic provisioning model in order to improve accuracy and makes comments on other related aspects of apply dynamic provisioning in China like prerequisites, limitations and so on.