Dynamic Loan Loss Provisions in Uruguay: Properties, Shock Absorption Capacity and Simulations Using Alternative Formulas
IMF Working Papers, May 1, 2010
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- Dynamic Loan Loss Provisions in Uruguay: Properties, Shock Absorption Capacity and Simulations Using Alternative Formulas
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Bibliographic details
- Authors: Torsten Wezel
- Published: May 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455200849.001
Summary and main findings
- Assesses the merits of countercyclical loan loss provisioning in Uruguay.
- Uses a stress test methodology to quantify the protection against macroeconomic shocks provided by the stock of dynamic provisions accumulated since 2001.
- Finds that medium-sized shocks would be fully absorbed, offsetting the additional costs caused by rising specific provisions.
- Simulates the path of dynamic provisions under the formulas used in Spain, Peru and Bolivia, showing that the alternative paths diverge significantly from the actual buildup and in part better conform to the Uruguayan credit cycle.
Methodology and analysis
- Stress test methodology applied to the stock of dynamic provisions accumulated since 2001 to evaluate shock absorption capacity.
- Simulation exercises comparing actual Uruguay dynamic-provision buildup with alternative formulas used in Spain, Peru and Bolivia.
Policy implications and interpretation
- Dynamic (countercyclical) loan loss provisioning provides protection against macroeconomic shocks.
- The accumulated stock of dynamic provisions since 2001 can fully absorb medium-sized shocks, mitigating the impact of rising specific provisions during downturns.
- Alternative provisioning formulas (Spain, Peru, Bolivia) yield divergent provision paths; some alternative paths may better align with the Uruguayan credit cycle, suggesting scope for evaluating formula design relative to domestic credit dynamics.