Here is an excerpt from his remarks:

Current accounting standards for loan loss provisioning, both here and abroad, are based on the so-called 'incurred loss' model. Under this model, a bank can reserve against a loan loss through a provision to the loan loss reserve only if that loss has been 'incurred', which means a loss that is probable and can be reasonably estimated. To meet that standard, banks have to document why a loss is probable and reasonably estimable, and the easiest way to do that is to refer to historical loss rates and the bank's own prior loss experience with the type of asset in question. Unfortunately, using historical loss rates to justify significant provisions becomes more difficult in a prolonged period of benign economic conditions when loss rates decline. Indeed, the longer the benign period, the harder it is to use acceptable documentation based on history and recent experience to justify significant provisioning. When bankers were unable to produce such acceptable historical documentation, auditors began to lean on them either to reduce provisions, or, in some circumstances, to take the extreme step of reducing the loan loss reserve by releasing so-called 'negative provisions' that counted as earnings.

Needless to say, banking supervisors, loving loan loss reserves as we do, did not like that result.

Click to view Mr Dugan's speech on loan loss provisioning and pro-cyclicality (PDF 35k).