It looks as though the "Dynamic Provisioning" (DP) approach or technique to the computation of Bank Capital in the context of Banking Supervision is gaining the ascendancy in the UK and Europe as a solution to ensuring banks hold sufficient reserves such that a credit crisis never occurs again. In reinforcing the tripartite arrangements to Banking Supervision and Regulation in the UK, the Chancellor appears to be favoring this approach which developed in Spain and it has to be said was successful (relatively). One challenge that Dynamic Provisioning gets around is the issue of procyclicality of capital buffers, perceived to be a problem with Basel II. In effect what DP does is to integrate Basel II Pillar One and Pillar Two by making total capital explicit and transparent over the business cycle. DP requires however an econometric model of the business cycle to drive the capital estimates predicated on outlooks for default (as a function of the business cycle). This is an interesting approach since finally an accounting standard is being putatively harnessed to an econometric technique.

Below some important references to the concept of Dynamic Provisioning;-

The Bank of England (2002)

Banca d'Espana (Web Page)

Banca d'Espana (presentation)

PROCYCLICALITY AND FINANCIAL REGULATION: Charles Goodhart

Accounting Standards Board (UK):

Banque de France

Markit Magazine

Freshfield Bruckhaus Deringer

Financial Stability Forum (FSF)

The Economist's City Lecture: Lord Turner

Basel II in FORTIS

KPMG IFRS Briefing Sheet

Mario Draghi

The review of the UK tripartite arrangements prepared by PriceWaterhouseCoopers

It is interesting to note give our basic value proposition at asymptotix which is to apply high performance computing driven predictive analytics to the current challenges in banking supervision and risk management that the technique of "Dynamic Provisioning" is now regarded as key to the successful provision of cloud and high performance computing to users and it is exactly the same mathematical algorithms which underpin the DP process in bank capital computation as it is in the assurance of service in cloud computing. This presentation from Platform Computing may help illustrate that point.