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Economy
In reply to the discussion: STOCK MARKET WATCH -- Friday, 15 June 2012 [View all]xchrom
(108,903 posts)42. The EU Smiled While Spain’s Banks Cooked the Books
http://www.bloomberg.com/news/2012-06-14/the-eu-smiled-while-spain-s-banks-cooked-the-books.html
Only a few years ago, Spains banks were seen in some policy-making circles as a model for the rest of the world. This may be hard to fathom now, considering that Spain is seeking $125 billion to bail out its ailing lenders.
But back in 2008 and early 2009, Spanish regulators were riding high after their countrys banks seemed to have dodged the financial crisis with minimal losses. A big reason for their success, the regulators said, was an accounting technique called dynamic provisioning.
By this, they meant that Spains banks had set aside rainy- day loan-loss reserves on their books during boom years. The purpose, they said, was to build up a buffer in good times for use in bad times.
This isnt the way accounting standards usually work. Normally the rules say companies can record losses, or provisions, only when bad loans are specifically identified. Spanish regulators said they were trying to be countercyclical, so that any declines in lending and the broader economy would be less severe.
Whats now obvious is that Spains banks werent reporting all of their losses when they should have, dynamically or otherwise. One of the catalysts for last weekends bailout request was the decision last month by the Bankia (BKIA) group, Spains third-largest lender, to restate its 2011 results to show a 3.3 billion-euro ($4.2 billion) loss rather than a 40.9 million-euro profit. Looking back, we probably should have known Spains banks would end up this way, and that their reported financial results bore no relation to reality.
Only a few years ago, Spains banks were seen in some policy-making circles as a model for the rest of the world. This may be hard to fathom now, considering that Spain is seeking $125 billion to bail out its ailing lenders.
But back in 2008 and early 2009, Spanish regulators were riding high after their countrys banks seemed to have dodged the financial crisis with minimal losses. A big reason for their success, the regulators said, was an accounting technique called dynamic provisioning.
By this, they meant that Spains banks had set aside rainy- day loan-loss reserves on their books during boom years. The purpose, they said, was to build up a buffer in good times for use in bad times.
This isnt the way accounting standards usually work. Normally the rules say companies can record losses, or provisions, only when bad loans are specifically identified. Spanish regulators said they were trying to be countercyclical, so that any declines in lending and the broader economy would be less severe.
Whats now obvious is that Spains banks werent reporting all of their losses when they should have, dynamically or otherwise. One of the catalysts for last weekends bailout request was the decision last month by the Bankia (BKIA) group, Spains third-largest lender, to restate its 2011 results to show a 3.3 billion-euro ($4.2 billion) loss rather than a 40.9 million-euro profit. Looking back, we probably should have known Spains banks would end up this way, and that their reported financial results bore no relation to reality.
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