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> The main cause of the losses is said to be from loan-loss provisions (when a bank sets aside money as an expense for future loans it expects won’t be repaid).
by tedunangst 4y ago
> The main cause of the losses is said to be from loan-loss provisions (when a bank sets aside money as an expense for future loans it expects won’t be repaid).
So no actual losses, and a year from now when those losses don't appear, they will record a magic billion dollar profit.
- refurb 4y agoSeems to be? Calling it a "loss" is more of an accounting viewpoint (holding reserves to offset possible loses lowering revenue) than what laymen would view as a "loss". But then again, the amount of reserves held is supposed to be a best estimate of actual losses that will be incurred with bad debt.
- seanhunter 4y agoLoan loss provisions cost actual real profit though because they cause the bank to hold more risk capital reserves, which basically means some of their capital is dry powder and isn't generating returns. The difference between their expected rate of return on risk capital and the risk free rate (which you could see as "opportunity cost of capital" basically) is lost for this amount.
- pgwhalen 4y agoHow exactly would you propose the accounting be done for loans? Should a bank realize a loss equal to the amount of loan at the time the loan is made, and then consider all future payments as profit? (Clearly not)
- chii 4y agobut if a loan is collateralized, the bank can consider the loan an asset, since the collateral will make the loan whole if the borrower defaults. But for credit cards, which usually is not collateralized, you cannot do that. Therefore, it makes sense to recognize the cost of loan-loss provisions as a cost.
- pgwhalen 4y agoGood point, my comment was only relevant for uncollateralized loans.