Today Lloyds has weighed in with a nice six month profit figure of £1.5 billion, to go with the HSBC superb $11 billion reported earlier. There should, however, be a government health warning given as to how these figures are being arrived at.
The figures being reported are compliant with Basel 3 Banking Regulations, which two weeks ago altered the regulatory environment under which banks are now reporting. These, if you remember, were greeted with whoops of joy by stock markets, as, in effect, losses were not going to be discussed publicly any more. It doesn’t mean they’ve gone away. In fact they are probably getting worse.
By avoiding the need to calculate profits and losses by reference to current market values – ‘mark to market’ -, Basel 3 has enabled banks to issue very juicy profit figures in the current reporting round. Losses are now to be reported not as the actual current position, but according to a new formula, called rather nicely ‘expected loss’.
With minimum lending rates low, and banks charging more for credit, current lending business is making nice fat margins. That we know. What we don’t know and are not being allowed to know, is how big the losses are on earlier lending. Banks no longer have to report these. All they need to do is to say that the markets the lending is based on, are ‘expected’ to recover, and that includes Greek properties and bank debts.
Valuers are permitted to look forward to happier days when markets have recovered their former values, and until then report to the world that no losses exist.
SUMMARY OF BASEL 3
the system is changed from mark to market to an ‘expected loss’ system, to be known as EL!!!!
as per this summarised version of Basel 3, heading number 4. –
Promoting stronger provisioning practices (forward looking provisioning):
- Advocating a change in the accounting standards towards an expected loss (EL) approach (usually, EL amount := LGD*PD*EAD).
Are people really so dumb?!!!
One other commentator can see that the reported profits are more PR than reality –
Bruce Packard, banks analyst at Seymour Pierce, said: “Lloyd’s management is to be congratulated for reporting profit before tax well ahead of expectations. Yet, this is profit in an accounting sense, rather than an economic sense, given the £132bn of government support the group is still receiving and the billions of wholesale funding with maturity of less than one year maturity.”
But Brucie, Old Chap, we fully expect that it will all work out
Bullshit In Action On the BBC here –
Meanwhile Chinese banking regulators show the rest of the world what a real banking stress test looks like –
Nadler on Kitco.com –
Read between the lines of this BBC report –