ACP45 Loc: Rhode Island

Government debt, corporate debt, consumer debt, manipulation of the financial markets,QE1, QE2, stock buybacks, the freezing up of the Repo Markets in December, MMT, ZIRP, etc., etc. Where is our financial system headed? Indeed, where is the global financial system headed?

Here is a fascinating and omnious article about where things are heading in our banking system, and a very insightful comment by another reader.

https://wolfstreet.com/2020/04/06/new-york-fed-fdic-tout-value-of-opacity-in-a-banking-crisis-to-keep-corporations-hedge-funds-pe-firms-counterparties-in-the-dark-about-weak-banks/

MuTang
Apr 6, 2020 at 2:26 pm

I work with banks and its amazing how much has already been done in the last couple weeks to make bank balance sheets opaque. A few examples:

1. Regulators have told banks that any loans they modify to help borrowers by deferring the principal and interest payments b/c of C***D do NOT have to be treated as a “troubled debt restructure”. This is significant because if these loans were treated as TDRs, their loan loss reserve requirements would spike. Increasing the loan loss reserve is done via a provision expense, which would crush earnings. Avoid TDR treatment would also help boost their regulatory capital ratios as well because some of them would require higher risk-weights under the Basel III capital rules.

2. Publicly-traded banks do NOT have to comply with a new accounting standard called “CECL” which would have required them to increase their loan loss reserve for “expected” losses. This was the most controversal accounting change in the history of banking, and it was set to go live for the first time this quarter. No more. CARES act delayed it, and then the FDIC,OCC, and Fed put the nail in the coughin by saying the impact on regulatory capital would be delayed for two years. This is a major embarrasment for FASB and the SEC, who make and enforce these rules. More importantly, this would have forced banks to have a much larger provision expense. The old method allows them to only reserve for ‘probable’ as opposed to ‘expected’ losses, so they can claim all of the modifications they have done to help borrowers with C***D are not ‘probable’. Net net — most banks will have severely unfunded loan loss reserves.

3. Amazingly, banks are allowed to accrue interest income for loans they modify to help borrowers with C***D, even if they grant P&I relief for 90-180 days to those borrowers. In other words, banks can recognize the revenue from these loans even if the borrowers do not pay it. Some will likely never pay it. This will inflate bank earnings this quarter.

Folks, the games are just beginning. As someone who works closely with banks, i would not have any faith in the credibility of the first quarter numbers for most banks.

lpnmajor Loc: Arkansas

Notice anything odd about what constitutes an economic crisis? Nothing is said of cash shortages, food rotting by the ton because no one has the means to purchase it, or any other actual "direct-to-human" calamity, no, it's all about debt, 1's and 0's sitting in a server somewhere.