Stop Manipulating Bank Earnings With Loan-Loss Reserves, Currency Comptroller Warns
Readers of Zero Hedge know well that one of the most abhorred (by us) accounting gimmicks employed by banks each and every quarter over the past 3 years to boost their bottom line, is to engage in loan-loss reserve releases: a process which has absolutely no associated cash flow benefit, but merely boosts EPS for GAAP purposes. In some cases, like this quarter's absolutely farcical JPM earnings release, the abuse is beyond the pale, as the offending bank releases reserves even as it reports surging non-performing loans: two processes which in a normal world can not coexist. Yet quarter after quarter banks keep on doing this, and in fact a big part of Q3's to date EPS outperformance is courtesy of financial company "earnings", of which, in turn, loan losses amount to about 50% of the entire blended financials bottom line. Yet while we can rage and warn, nothing usually happens until there is a market crash due to the gross manipulation of reality that such an activity entails. Luckily, this time someone with more clout in the legacy establishment has now stood up to warn about the mounting dangers associated with the relentless abuse of loan-loss reserve releases: none other than the US Comptroller of the Currency.
The U.S. could stop banks from boosting their earnings by cutting back on reserves held against future loan losses, a top bank regulator said Monday, arguing that the economy remains too rocky for financial institutions to lower their cushions.
Comptroller of the Currency Thomas Curry has been warning for several months about the practice of bank-reserve releases, which occur when banks add less to their loan-loss reserves than they write off for uncollectible loans. The difference has bolstered banking profits in recent quarters.
Mr. Curry repeated his criticism in a speech before a group of bank risk managers in Dallas, citing the potential for future losses in residential and commercial real estate.
"I remain very concerned that too many institutions are continuing to reduce provisions solely to boost earnings," Mr. Curry said.
Yet, sadly, while the US "could" intervene, it won't for the simple reason that everyone in the US is beholden to these same banks whose ongoing fake profitability is critical to the status quo, the government and everyone in it. After all the, everyone has now gone all in on the massive systemic ponzi. And the Currency Comptoller will be the last to dare to pull the plug on what is a black capital hole amounting to trillions and trillions of dollars.
"We are ready to take action if and when it is needed," he said.
Regulators are concerned banks will suffer more losses from borrowers who took out home-equity loans from 2004 to 2008, as the housing bubble grew and then burst, Mr. Curry said. Most of those loans allowed borrowers to make only interest payments for seven to 10 years. When that period ends, some borrowers are unlikely to be able to meet monthly payments that are increased to include principal. And many likely won't be able to refinance.
Action is needed. Observe the billions in "profits" JPM alone has made from loan-loss reserve releases (blue bar):
Alas, no action will be taken. And it is this hypocrisy that makes a total mockery of all the so-called regulators in the US. Because at least the banks are honest in their ongoing manipulation and fraud: they benefit from it, and why not: after all nobody dares to stop them.
It is the regulators whose job is to put an end to this behavior. But they are afraid: for their jobs, for their legacy, for their petty egos.
As long as this doesn't change, the US economy, and its capital markets, just continue happily day after day, to the most epic crash every imagined. The good news is that only that terminal event has any hope of changing all these things that we, and even the regulators now, lament.
Everything else is hollow rhetoric.