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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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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.
Oct 11, 2012. 03:41 PM
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