danish

Iceland's Best-Laid Plans Fall Apart

No. Don't blame accounting systems. Double entry accounting has worked for centuires, and will keep track of the $80 interest receivable which is a book keeping entry. The borrower of $1000 loan is expected to have produced collateral for the loan and to have a business plan to use this money to trade and to make far more than $80 in earnings to repay the loan and to take his share of profit. The bank must have known this. All that is hepenning here in simple terms is that the collateral collapsed and the $1000 receiveable has turned into a bad debt and must be written off. So if the bank did not have enough provisions for bad debt then the bank is doomed to fail. In fact, thanks to accounting systems that opened up the can of worms.