Saturday, December 1, 2012

Mervyn King: are banks helping people to avoid denting balance sheets?

As reported by the Guardian, the Bank of England's Mervyn King is concerned that banks are helping people struggling to pay their loan for fear of denting their own balance sheets and in the process making the bad debt problem even worse.

[Sir Mervyn King] discussed at the Treasury select committee the use of "forbearance" by banks to help customers in difficulty to schedule their loans. 
"Bad forbearance is where the banks don't insist on repayment not because they care about their customer but because they're worried about the implications for their own balance sheet, given the accounting conventions under which banks operate," he said. 
"That is undoubtedly a concern, because the issue is ... to what extent are the balance sheets giving an accurate representation of the underlying position of the banks?"...
Investors argue that one reason the share prices of the banks are lower than the value of their assets is because they are nervous about a potential wave of bad debts in the future.
Clarity on this subject would be welcomed by investors...
And the only way to provide clarity on this subject is to require the 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, investors and regulators like the Bank of England can assess exactly how bad the 'forbearance' problem is.

Equally importantly, investors can exert market discipline on the banks so that the banks recognize their losses on this bad debt upfront rather than try to slowly recognize the losses over time as the banks generate earnings in excess of what is needed to pay banker bonuses and increase book capital levels.

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