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Loan-loss provisions and bank buffer-stock capital

Record type: Monograph (Discussion Paper)

In principle, bank capital serves two functions. It represents i) the value of shareholder equity and ii) the value of the buffer stock available to absorb unexpected losses. The calculation of expected loan losses and the provisioning to cover these losses enables a clearer picture of the economic structure of bank balance sheets. In this paper, it is argued that such calculations should take into account i) the implicit subsidy enjoyed by borrowers in the form of limited liability and ii) the expected costs of administering insolvency in the event of borrower default. An expectation represents the most likely outcome. Hence there is a case that expected losses should be treated in exactly the same manner as losses which have already been identified. That is, provisioning against such losses should not be included in capital. However, provisions for unexpected losses should be included in capital. The major policy implication is that the timing of provisioning will be brought forward and the value of bank capital will be less than currently recorded using historical value accounting

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Citation

McKenzie, George (1994) Loan-loss provisions and bank buffer-stock capital , Southampton, UK University of Southampton (Discussion Papers in Accounting and Management Science, 94-78).

More information

Published date: 1994

Identifiers

Local EPrints ID: 36046
URI: http://eprints.soton.ac.uk/id/eprint/36046
PURE UUID: 36a69316-88ce-4011-93e2-f471349b36c2

Catalogue record

Date deposited: 03 May 2007
Last modified: 17 Jul 2017 15:46

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Contributors

Author: George McKenzie

University divisions


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