http://www.zerohedge.com/news/2012-10-30/stop-manipulating-bank-earnings-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.
From WSJ:
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.
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