I recently met Bryce Schonberger Phd, from the University of Rochester at a recent event by the AFA event in NYC. I found his research paper on loan loss provisioning by banks quite of interest. Essentially the paper’s premice is that Bank regulators and academics have long conjectured the beneficial effects of preemptive loan loss provisioning (i.e., making higher provisions during good times so as to avoid doing so during bad times) for bank lending and stability.
In contrast, accounting regulators express concerns about its potential adverse impact on reporting transparency due to the ensuing income smoothing. The paper goes on in demonstrating that ensuing contractions in bank lending are weaker for banks that built buffers by provisioning preemptively.
Overall, the paper highlight the tradeoff between bank stability and transparency inherent in preemptive provisioning – while proactive recognition of unrealized losses reduces bank transparency, it increases bank stability (if and) when losses materialize.