With banks set to report Q3 earnings, regulators will have an eye on how much of a boost profits...


With banks set to report Q3 earnings, regulators will have an eye on how much of a boost profits get by slashing reserves for bad loans. Perfectly legal, the action nevertheless gives an unsustainable boost to profit - it's accounted for 23% of the bottom line for TBTFs over the last year - making banks look healthier just at the time they've thinned cushions against the next downturn.

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Comments (3)
  • MexCom
    , contributor
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    Its refreshing to click on a WSJ link and be able to read it instead of only getting an ad for a subscription.

     

    My read has it that some they do this and some say they do that. A conspiracy like the BLS cooking their numbers? The banks are the most regulated entity of our society. Just about every agency of the Federal Government had their oversight scrutiny of their books.

     

    They are in business for the long haul and their reporting is their best ability to portray the finances of their company as truthfully and as accurately as possible. I have the believe that there is no advantage trying to make one quarter look extra specially unless for some reason such as a proposed secondary offing of stock that is hardly advantagsous in the current environment for them to do so.

     

    If anything, it would be economically advantagiuos to set aside as much as possible to cost currently cost out expenses to avoid the current payment of taxes on the income. This allows more cash reserves and capital to improve operations and make their balance sheet look more secure.
    11 Oct 2012, 02:05 PM Reply Like
  • aa624993
    , contributor
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    Reserves are established to protect companies, shareholders, against future risk and is accounted for as a liability, thus reducing profits when established. When reserves are released, the liability is reduces and the funds flow to the bottom line. This is a common accounting practice used by all companies. Reserves go up and down with perceived future risk/liabilities. No big deal.
    11 Oct 2012, 03:41 PM Reply Like
  • aaran
    , contributor
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    The true measure of both earnings and the cushion banks have to absorb risks has been and always will be pretax, pre-provision earnings. LLR and equity capital are both available to absorb losses. While once could perceive earnings to be under-reported in times of reserve building and over-reported when they are reduced (or "released") this is driven by SEC scrutiny to avoid window dressing. It is embarrassing to hear regulators highlight reserve releases as "troublesome". Andrew M. Aran, CFA
    11 Oct 2012, 04:38 PM Reply Like
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