Work detail

Creation of provisions – Pro-cyclical behavior of banks

Author: Mgr. Anna Matějovská
Year: 2013 - summer
Leaders: doc. PhDr. Adam Geršl Ph.D.
Consultants:
Work type: Finance, Financial Markets and Banking
Masters
Language: English
Pages: 82
Awards and prizes:
Link:
Abstract: In relation to the latest economic crisis much attention was paid to the bank capital
requirements. Many papers discuss the pro-cyclical effect of these capital requirements
and the options of how to stabilize the banking industry and financial system. In this
thesis I researched another instrument which can cause the pro-cyclical effect – the loan
loss provisions. In reaction to this issue the Spanish central bank has adopted the model
of dynamic provisioning which acts counter-cyclically. This model is supposed to
balance the amount of created provisions and banks’ profit over the time. In this thesis I
introduce a hypothetical situation in which the countries using the Euro currency adopted
the model of dynamic provisioning and I examine the hypothesis that the adoption of this
model would mitigate the latest economic crisis as the banks would achieve higher
profits during the time of recession. Based on the conducted research I confirmed my
hypothesis and conclude that the dynamic provisioning would balance the economic
swings. However, the results also showed that the set-up of dynamic provisions model is
crucial. In order to make the model efficient the model coefficients have to be precisely
determined by central banks or individual banks and approved by independent
supervisors.

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