Base countercyclical provisioning on expected losses
A system of dynamic provisions based on expected losses as suggested by the Turner Review is a sensible way forward, new research from the Bank of Italy posits.
The analysis shows:
· how dynamic provisions work in a general framework based on expected losses;
· how they work according to the Spanish system, which is the only real example of countercyclical provisioning; and
· the differences and similarities between the expected loss model and the Spanish approach.
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