This simulation-based paper investigates the impact of different methods of dynamic provisioning on bank soundness and shows that this increasingly popular macroprudential tool can smooth provisioning costs over the credit cycle and lower banks’ probability of default. In addition, the paper offers an in-depth guide to implementation that addresses pertinent issues related to data requirements, calibration and safeguards as well as accounting, disclosure and tax treatment. It also discusses the interaction of dynamic provisioning with other macroprudential instruments such as countercyclical capital. Reducing the procyclicality of the banking sector by way of macroprudential policy instruments has become a policy priority. The recent crisis has illustrated how excessive procyclicality of the banking system may activate powerful macro-financial linkages that amplify the business cycle and how increased financial instability can have large negative spillover effects onto the real sector.2 Moreover, research has shown that crises that included banking turmoil are among the longest and most severe of all crises.3 Although there is no consensus yet on the very definition of macroprudential policy, an array of such tools, especially those of countercyclical nature, has been applied in many countries for years.4 But it was only during the financial crisis that powerful macro-financial linkages played out on a global scale, conveying a sense of urgency.