Provisions are a traditional instrument of risk management, and are created to minimize the potential negative effects of banking operations. Additionally, they have an impact on the financial performance of the bank. They also represent the principle of prudence working in practice.

As there are no international standards for either loan classification or provisioning, and international regulations in the area are virtually non-existent, the paper focuses on the general trends and the Polish solutions to the problem. The author analyses the subsequent regulatory changes by the Committee for Banking Supervision and their impact on the conditions for the operation of banks.

In general terms, the tendency in the world is for the banks to determine the desired coverage ratio themselves. The supervising bodies tend to retain the right to assess the level of provisions ex post. In the European Union, only the Spanish and Portuguese supervising bodies impose a minimum level of provisions on their banks, expressed as a percentage of loans granted (R.Wierzba: Harmonizacja nadzoru bankowego w UGiW. "Bank" nr 10/2000, p. 27).

In Poland, regulation relating to loan classification and provisioning has been particularly volatile. Determined by external authorities, during the 90s it was the most frequently amended regulation (seven times by the Central Bank and four times by the Committee for Banking Supervision).

The most significant changes introduced by the Committee regulations included:

• introducing, in terms of recoverability, a new category of loan ("watch list")
• defining the concept of threatened loans as non-performing, doubtful and bad ones;
• extending the list of reductions to the provision base;
• imposing the duty to provision for consumer loans under normal circumstances, for "watch list" loans and amounts due from the State Treasury.

However, the main issue to be resolved is the legality of Committee regulations, including those relating to provisions for bank risk .

The obligation to create provisions for new categories of loans has put banks under additional strain. The effect was somewhat moderated by allowing more types of collateral reduce the base for compulsory provisioning.

Obviously, the higher the provisioning base, the higher minimum percentage level of provisions. Also, the fewer provisions classified as expense, the less bank-friendly is the provisioning system - in terms of banks' financial performance.

Notwithstanding the principles adopted in classifying loans and provisioning, the choice of methods to manage bank risk should be made with a view to the bank's safety and economic performance.