Monday, September 24, 2012

Financial Policy Committee worried about losses from 2008 still on UK bank books

As reported by the Guardian, the UK's Financial Policy Committee
is worried that UK banks are still sitting on huge losses from loans to businesses and mortgage holders dating back to the Lehmans crash that have yet to be fully written down on their balance sheets.
The fact that these losses are still hidden on and off UK banks balance sheets is the direct result of the adoption of the Japanese model for handling a bank solvency led financial crisis.

Under the Japanese model, bank book capital levels and banker bonuses are preserved at all costs.

As a result, policies like regulatory forbearance are adopted.  Regulatory forbearance allows banks to create 'zombie' loans by engaging in 'extend and pretend' rather than recognizing the losses on the loans and the related decline in bank book capital levels.

Equally troubling to your humble blogger is the idea that the UK's Financial Policy Committee might not know the actual size of the losses that are being hidden.  Doesn't this lack of information clearly call into question the ability of the Financial Policy Committee to do its job?

Regular readers know that your humble blogger has been calling for the adoption of the Swedish model for handling a bank solvency led financial crisis since the beginning of the crisis.

Under the Swedish model, banks recognize all of the losses on the excess debt in the financial system today.

This was done in Iceland and it has successfully put the financial crisis behind it.  Iceland required its banks to recognize the losses that they would have experienced if the banks had gone through the long drawn out process of default, bankruptcy and foreclosure without going through the process.

I have also been calling for requiring banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

With this information, market participants can exert discipline on the banks to both recognize their losses and clean up their troubled exposures.

Had ultra transparency rather than additional complicated regulations and more regulatory supervision been adopted in response to the financial crisis, the Financial Policy Committee would not have to worry in 2012 about losses occurred in 2008 still being hidden by the banks.

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