Tuesday, June 5, 2012

UK banks sitting on billions of undeclared losses

According to a Telegraph article,

Britain's banks are sitting on a £40bn black hole of undeclared losses that are preventing them from making vital loans to businesses and households.
And the significance of this is
Tim Bush, head of governance and financial analysis at PIRC, claimed the undeclared losses meant banks have not been clearing their balance sheets of bad debts and releasing the funds to support viable businesses and households. 
"The scandal is the fact that banks are delaying de-risking and de-gearing due to the accounting standards," he said. "The funds are being tied up, rather than being put to work elsewhere."
Regular readers know that this confirms what your humble blogger has been saying about what has been allowed to happen as a result of policymakers and financial regulators choosing the Japanese model for handling a bank solvency led financial crisis.

PIRC, the shareholder advisory group, has analysed the 2011 accounts of the UK's top five banks to calculate how much they expect to write off as bad debt in the coming years but have yet to take against profits. 
Royal Bank of Scotland (RBS) was in the worst condition, PIRC found, with £18bn of undeclared losses that would wipe out more than a third of its capital buffer and potentially force the 82pc state-owned lender back to the taxpayer for another rescue.
Actually, a taxpayer rescue was never needed in the first place.  The UK has a modern financial system that features both deposit insurance and access to central bank funding.  RBS should have been required to absorb all of its losses in 2008/2009 and then left to rebuild its book capital level through retention of its earnings.    
HSBC had £10bn in undeclared losses, Barclays £6.7bn, Standard Chartered £3.6bn and Lloyds Banking Group £3.6bn. 
PIRC presented its numbers to all the banks and none disputed them.
 PIRC said the rule was "masking the true position [of the accounts] by including fictional assets and fictional profits". 
Translation:  each bank admitted that its capital ratio is meaningless.  By definition the capital ratios are meaningless because equity was overstated by the amount of the undeclared losses.

Is this a financial disclosure violation in the UK?

Since none of the banks disputed the size of the undeclared losses, we know that they have at least this amount of undeclared losses.  The real question is 'how much more in undeclared losses do they have?'

If UK banks are hiding this much in undeclared losses, how much is being hidden in France, Germany and the US?
Dividends and bonuses are being paid out on inflated profit numbers, it added, when they should be retained to boost the banks' capital cushions.
Confirmation that only the bankers benefit from the Japanese model! 

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