Effect of the Basel Accord capital requirements on the loan-loss provisioning practices of Australian banks

James R. Cummings*, Kassim J. Durrani

*Corresponding author for this work

Research output: Contribution to journalArticle

12 Citations (Scopus)

Abstract

There are two distinct regimes for bank provisioning in Australia: a forward-looking model for regulatory purposes and an incurred loss model for financial reporting. This study examines the former using a unique but confidential database. We find evidence that: (i) banks increase provisions in anticipation of future lending growth, (ii) banks allocate part of surplus capital above regulatory requirements to pre-fund future credit losses through provisions, and (iii) banks allocate part of higher earnings for the same purpose. These results suggest that bank managers use their discretion in setting provisions to dampen the impact of fluctuations in credit market conditions on their lending activities. For internal ratings-based banks, results suggest that the revised Basel framework allowing these banks to estimate expected losses using their own credit risk models may come at a cost of reduced general provisions.

Original languageEnglish
Pages (from-to)23-36
Number of pages14
JournalJournal of Banking and Finance
Volume67
DOIs
Publication statusPublished - 1 Jun 2016

Keywords

  • Commercial banks
  • Bank regulation
  • Loan-loss provisions
  • Bank capital requirements

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