Provisions and Their Role in Time of Crisis

Abstract Provisions help organizations manage uncertainty and reduce the economic impact of shocks, particularly during crises. As defined by IAS 37, provisions are liabilities with uncertain amounts or timing and are recognized when a present obligation exists and an outflow of resources is probable. The global financial crisis (2007-2009) demonstrated that the traditional incurred-loss accounting model delayed loss recognition, thereby increasing pressure on bank balance sheets. In response to these shortcomings, IFRS 9 introduced the expected credit loss (ECL) model, which facilitates earlier recognition of asset quality deterioration and aims to reduce procyclicality. Empirical studies, particularly during the COVID-19 pandemic, show that banks increased provisions rapidly in response to heightened economic uncertainty. However, provisioning decisions continue to vary due to managerial discretion and differences in macroeconomic scenarios, which affect the consistency and timeliness of provisions. This article examines how provisions function during crises, the evolution of the regulatory framework, and their broader impact on financial stability.