Saturday, June 30, 2012

The BIS reminds us that the bank financial statements are meaningless

In his Bloomberg column, Jonathan Weil looks at the BIS report calling for banks to recognize all the losses hidden on and off their balance sheets.

The Bank for International Settlements, which acts as a bank for the world’s central banks, should know fudged numbers when it sees them. What may come as a surprise is how openly it has been discussing the problem of bogus balance sheets at large financial companies. 
“The financial sector needs to recognize losses and recapitalize,” the Basel, Switzerland-based institution said in its latest annual report, released this week. “As we have urged in previous reports, banks must adjust balance sheets to accurately reflect the value of assets.” 
The implication is that many banks are showing inaccurate numbers now.....
The inaccurate numbers are the direct result of the policymakers and financial regulators adopting the Japanese model for handling a bank solvency led financial crisis at the beginning of our current financial crisis.

Under the Japanese models, policies are adopted to protect bank book capital levels.  For example, regulators pursue regulatory forbearance which allows banks to keep zombie borrowers alive using 'extend and pretend' practices.
“The challenge is to provide incentives for banks and other credit suppliers to recognize losses fully and write down debt,” the report said. “Supporting this process may well call for the use of public sector balance sheets.” 
So there you have it. More than four years after the financial crisis began, it’s so widely accepted that many of the world’s banks are burying losses and overstating their asset values, even the Bank for International Settlements is saying so -- in writing. (The BIS’s board includes Federal Reserve Chairman Ben Bernanke and Mario Draghi, president of the European Central Bank.) It fully expects taxpayers to pick up the tab should the need arise, too.....
Bailing out banks is another Japanese model policy.  While great for payment of banker bonuses, it completely ignores that banks in a modern banking system do not need to be bailed out.

With deposit insurance and access to liquidity from a central bank, a bank can operate for years with negative book capital levels and support the real economy.  While it is operating with negative book capital levels, the bank retains 100% of pre-banker bonus earnings to rebuild its book capital levels.

Since Ben Bernanke sits on the BIS Board, does this mean he endorses the idea that US banks should recognize all the losses hidden on and off the US banks' balance sheets?
The BIS report got this much right: The lack of transparency and credibility in banks’ balance sheets fuels a vicious cycle. When investors can’t trust the books, lenders can’t raise capital and may have to fall back on their home countries’ governments for help. This further pressures sovereign finances, which in turn weakens the banks even more. The contagion spreads across borders. There is no clear end in sight.
Please re-read the highlighted text as Mr. Weil lays out why policymakers and financial regulators need to adopt the Swedish model with ultra transparency.  It ends the cycle of governments needless wasting their scarce access to funds on bailing out the banks.  It makes banks' balance sheets transparent and restores confidence.

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