Provisionszz

When a provision is taken, an amount is set aside to cover a possible future loss.
For banking book positions that are not marked to market (e.g. loans), provisioning
is a key part of the portfolio valuation process. Trading positions are marked to
market, though, so it might seem that provisioning is not necessary. There are
several situations, however, where provisions are made against possible losses.
Ω The portfolio may be marked to market at mid-prices and rates. If the portfolio
had to be sold, the bank would only receive the bid prices. A provision of the
mid–bid spread may be taken to allow for this.
Ω For illiquid instruments, market spreads may widen if an attempt is made to sell
a large position. Liquidity provisions may be taken to cover this possibility.
Ω High yield bonds pay a substantial spread over risk-free interest rates, reflecting
the possibility that the issuer may default. A portfolio of a small number of such
bonds will typically show steady profits from this spread with occasional large
losses from defaults. Provisions may be taken to cover losses from such defaults.
When an explicit provision is taken to cover one of these situations, it appears as
a loss. For backtesting, such provisions should be removed from the P&L figures.
Sometimes, provisions may be taken by marking the instrument to the bid price or
rate, or to an even more conservative price or rate. The price of the instrument may
not be marked to market daily. Price testing controls verify that the instrument is
priced conservatively, and therefore, there may be no requirement to price the
instrument except to make sure it is not overvalued. From an accounting point of
view, there is no problem with this approach. However, for backtesting, it is difficult
to separate out provisions taken in this way, and recover the mid-market value of
the portfolio. Such implicit provisions smooth out fluctuations in portfolio value, and
lead to sudden jumps in value when provisions are reevaluated. These jumps may
lead to backtesting exceptions despite an accurate risk measurement method. This
is illustrated in Figure 9.9 (on p. 281).