Can the dynamic provisions improve the solvency of the banks? a study of the peruvian Banking System

Abstract

The present study analyzed the effects that the implementation of the procyclical rule has had on the solvency of Peruvian banks. In a context where the crisis of 2008 reaffirmed the role of the financial system, mainly the banking system, whose problems had a negative impact on economic activity. In the Peruvian case, the pro-cyclical rule was implemented, which obliges banks to accumulate provisions in expansive stages of the economic cycle, so that they can then be used in stages of tension or reversal of the cycle. These additional provisions reduce the funds that could be destined in loans to the economy; however, it increases the funds available to deal with losses. Applying the voltage test methodology specified in Čihák (2007), for the Peruvian banking system before a first shock of adequacy of the stock level of provisions, it was found that the largest banks have maintained an adequate level of provisions. While in the case of a second shock, the increase in loans in the doubtful category, as a result of 23% of normal loans and potential problems downgrade, in this scenario the capital ratio is reduced to levels below 10%, the additional provisions only helped to reduce this impact on average to 0.05%.