Is The Loan Loss Provision Pro-Cyclical？

Loan loss provision is reserve based on an assessment and impairment test of bank’s loan, It constitutes the two basic line against the risk in commercial banks with regulatory capital, so it’s important for the sound operation of banks and stable development of financial industry. Loan loss provision reserved based on "Incurred Loss Model" itself has pro-cyclical, reducing when the economic upward, increasing during the economic downturn. Since the subprime mortgage crisis, "Incurred Loss Model" is widely reviled, discussion about "the expected loss model" whether and how to replace "the occurred loss model" is very fierce. The dynamic provisioning system used in Spanish banking behave well in this crisis, and get international recognition. Many country gradually changing regulatory philosophy, taking the use of combining system of macro-prudential and micro-prudential supervision, and in the macro-prudential basis, strengthen counter-cyclical regulation starting from the time dimension, easing the procyclical of loan loss provisions, even of the credit Market.This paper first analyze the procyclicality of China’s commercial banks’ loan loss provisions in the base of China’s special institutional background, further, will the procyclicatity be conducted to credit market and thus affect the stability of the financial system? At last, considering the Chinese financial market reform, interest rate marketization, the rise of the Internet financial, this paper further analyze the procyclicality of China’s commercial banks’ loan loss provisions to the credit market under different competition environment(market power), hoping to providing some suggestions to establish prospective provision system, improve the regulation system for the commercial banks in the new era.