Tuesday, March 12, 2013

British banks may be harboring black hole of losses

The Telegraph carried an article in which one of the UK's largest investor group tried to estimate the size of the black hole of losses that remain hidden on and off the balance sheets of the UK banks.

Regular readers know that there is absolutely no reason that investors should have to guess what the size of this black hole is.  This is information that is both knowable and should be shared with the investors on an ongoing basis.

All market participants would know what the size of the black hole is if banks were required to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

There are numerous benefits of providing ultra transparency including:  banks would have been forced to recognize these losses five years ago; banks would have rebuilt their book capital levels by retaining 100% of pre-banker bonus earnings; and banker pay would have reflected the losses.

Instead, the banks have a black hole on their balance sheet of unknown size and banker bonuses continue with only the slightest blip for the financial crisis.

British banks may be harbouring a black hole of as much as £50bn in undeclared losses that do not show up in their accounts but hamper their efforts to lend, a shareholder group has warned. 
PIRC has calculated the amount of bad debts the banks may have to write off in coming years but have yet to subtract from profits, together with other items such as deferred bonuses not booked. 
HSBC, which is the biggest bank by assets, was shown to have £10.4bn of hidden losses, the Royal Bank of Scotland has £9.4bn, and Barclays has £7.3bn. Lloyds Banking Group has £2.5bn and Standard Chartered £2.2bn. Together the undeclared losses total £31.8bn. 
The research shows the distorting impact the accounting rules, which allow bad loans to remain hidden, have on bank results. 
PIRC applied old-style UK GAAP accounting rules, which applied for 100 years until 2005, to the figures released in the 2012 banks’ accounts. 
Apart from Basel rules that require banks to declare half the expected losses over a year, bad loans and expected losses do not appear in the banks’ accounts under International Financial Reporting Standards (IFRS)..... 
The warning follows regulatory pressure to force the UK’s banks and building societies to disclose their hidden losses, which supervisors at the Bank of England have suggested could total as much as £60bn. 
Lenders have just weeks left to clarify present the regulators with plans to fill the holes....

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