INSTABILITY IN THE BANKING INDUSTRY IS DYNAMIC PROVISIONING A LEEWAT?
The inability of many banks the world over to absorb loan loss and buffer the recessional shock posed by the current global economic crisis has raised questions as to the adequacy of the method of loan loss provisioning they adopted- Incurred loan lass approach. With serious doubts cast on incurred loan lass provisioning, this study reviewed both theoretical and empirical literature on loan has provisioning with a view to suggesting a better approach having identified the basic weakness – of the incurred loan lass provisioning method as its procyclically, the study suggested the adoption of dynamic provisioning approach as a panacea. In boom periods when earnings are high, male provisions are made to help smoothen earnings and reduce profit volatility during recessions. This will reduce instability and increase confidence in the financial system.