Banker to the bankers knows the numbers are lying

Guest Column: Jonathan Weil
The Bank for International Settlements, which acts as a bank for the world’s central banks, should know fudged numbers when it sees them. What may come as a surprise is how openly it has been discussing the problem of bogus balance sheets at large financial companies. More

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OP-ED

Banker to the bankers knows the numbers are lying

Guest Column: Jonathan Weil
Posted 7/9/12

The Bank for International Settlements, which acts as a bank for the world’s central banks, should know fudged numbers when it sees them. What may come as a surprise is how openly it has been discussing the problem of bogus balance sheets at large financial companies.

“The financial sector needs to recognize losses and recapitalize,” the Basel, Switzerland-based institution said in its latest annual report, released last month. “As we have urged in previous reports, banks must adjust balance sheets to accurately reflect the value of assets.” The implication is that many banks are showing inaccurate numbers now.

Unfortunately the BIS’ suggested approach is almost all carrot and no stick. “The challenge is to provide incentives for banks and other credit suppliers to recognize losses fully and write down debt,” the report said. “Supporting this process may well call for the use of public-sector balance sheets.”

So there you have it. More than four years after the financial crisis began, it’s so widely accepted that many of the world’s banks are burying losses and overstating their asset values, even the Bank for International Settlements is saying so – in writing. (The BIS’ board includes Federal Reserve Chairman Ben S. Bernanke and Mario Draghi, president of the European Central Bank.) It fully expects taxpayers to pick up the tab should the need arise, too.

In this respect, little has changed since the near-meltdown of 2008, especially in Europe. Spain has requested 100 billion euros ($125 billion) to rescue its ailing banks. Italy, perhaps the next in line for a European Union bailout, is weighing plans to boost capital at some of the country’s lenders through sales of their bonds to the government.

Those bank rescues almost certainly won’t be the last. All but four of the 28 companies in the Euro Stoxx Banks Index trade for less than half of their common shareholder equity, which tells you investors don’t believe the companies’ asset values. While it may be true that the accounting standards are weak, the bigger problem is they are often not followed or enforced.

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