Finance and Credit

A Countercyclical Model of Formation of Loan Loss Provisions Is a Necessary Condition of the Banking Sector Stability

Vol. 24, Iss. 2, FEBRUARY 2018

Received: 27 December 2017

Received in revised form: 18 January 2018

Accepted: 1 February 2018

Available online: 1 March 2018

Subject Heading: Banking

JEL Classification: 

Pages: 414–429

Meshkova E.I. Financial University under Government of Russian Federation, Moscow, Russian Federation

Subject The article examines the correlation between the bank's interest policy and the formation of loan loss reserves in the context of ensuring the financial stability of the credit institution.
Objectives The article aims to analyze the interest rate policy of banks and loan loss provisions formation, identify problems in this area, and develop a model of provision formation that meets the requirements on the banking sector stability in a better way.
Methods For the study, I used the systems approach, methods of comparative and quantitative statistical analyses, and expert appraisal techniques.
Results The article proposes certain measures to improve the interest rate policy of banks and a model of loan loss provisions formation, which will allow to overcome the procyclical nature of provisions formation and contribute to the maintenance of banking sector sustainability.
Conclusions and Relevance The significant problem of ensuring the financial stability of the banking sector is the lack of direct connection between the high risk premium and the formation of a real source of loan repayment. The research results are expedient to use for the improvement of banking regulation.

Keywords: interest-rate policy, risk premium, expected loss, interest margin, loan loss provisions

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ISSN 2311-8709 (Online)
ISSN 2071-4688 (Print)

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November 2018