Press release concerning the third research seminar

In the third research seminar of the Bank of Slovenia, Mr. Jesus Saurina Salas from the central bank of Spain presented research on credit growth and dynamic provisions. The authors of the mentioned research analyse a cyclic movement of credit activity, bad loans and provisions for losses of banks in Spain. All the three phenomena observed are highly cyclical both in Spain and in many other countries. In competitive circumstances and economic prosperity, banks offer credits under loosened conditions resulting from a perception of low credit risk in a given moment, taking into account a low level of bad loans. The bad quality of credits granted will become evident only afterwards, during economic recession, when deferred payment and insolvency regarding the settlement of liabilities start appearing. The low level of provisions applying to credit risk in the period of economic prosperity shows that the latent risk has not been properly estimated and that bank profits are therefore overestimated. Reversely, bank profits strongly shrink during economic recession because of the needs for creating additional provisions for credit risk. In their presentation, the authors present a concept of introducing dynamic reservations in Spain, which should contribute to more appropriate identifying and showing the losses estimated for credit risk.