Financial Instruments: Education Session — BdE Provisioning
Model Two representatives from the Bank of Spain (regulator of
Spanish banks) presented the statistical provisioning approach
which the BdE requires from entities regulated by them. The
representatives explained that, in their opinion, the model
incorporates losses incurred due to under-pricing of credit in
times of boom in the lending cycle due to market over-optimism.
The lending cycle per the model is closely correlated with the
economic cycle as a whole. The model is based on a statistical
formula which incorporates an element of collective impairment
relating to the point in the lending cycle ('alpha') and
incurred losses relating to individual assets ('beta'). The
alpha component is a collective assessment and applied to the
change in the portfolio of assets at each date of assessment.
Thus in times of boom in the lending cycle, the alpha component
is high relative to the beta component, whereas this trend is
reversed in times of slump as incur