Smart. Sharp. Funny. Fearless.
Saturday, October 22, 2016

June 15 (Bloomberg) — Only a few years ago, Spain’s banks were seen in some policy-making circles as a model for the rest of the world. This may be hard to fathom now, considering that Spain is seeking $125 billion to bail out its ailing lenders.

But back in 2008 and early 2009, Spanish regulators were riding high after their country’s banks seemed to have dodged the financial crisis with minimal losses. A big reason for their success, the regulators said, was an accounting technique called dynamic provisioning.

By this, they meant that Spain’s banks had set aside rainy- day loan-loss reserves on their books during boom years. The purpose, they said, was to build up a buffer in good times for use in bad times.

This isn’t the way accounting standards usually work. Normally the rules say companies can record losses, or provisions, only when bad loans are specifically identified. Spanish regulators said they were trying to be countercyclical, so that any declines in lending and the broader economy would be less severe.
What’s now obvious is that Spain’s banks weren’t reporting all of their losses when they should have, dynamically or otherwise. One of the catalysts for last weekend’s bailout request was the decision last month by the Bankia group, Spain’s third-largest lender, to restate its 2011 results to show a 3.3 billion-euro ($4.2 billion) loss rather than a 40.9 million-euro profit. Looking back, we probably should have known Spain’s banks would end up this way, and that their reported financial results bore no relation to reality.

Dynamic provisioning is a euphemism for an old balance- sheet trick called cookie-jar accounting. The point of the technique is to understate past profits and shift them into later periods, so that companies can mask volatility and bury future losses. Spain’s banks began using the method in 2000 because their regulator, the Bank of Spain, required them to.

“Dynamic loan loss provisions can help deal with procyclicality in banking,” Bank of Spain’s director of financial stability, Jesus Saurina, wrote in a July 2009 paper published by the World Bank. “Their anticyclical nature enhances the resilience of both individual banks and the banking system as a whole. While there is no guarantee that they will be enough to cope with all the credit losses of a downturn, dynamic provisions have proved useful in Spain during the current financial crisis.”

The danger with the technique is it can make companies look healthy when they are actually quite ill, sometimes for years, until they finally deplete their excess reserves and crash. The practice also clashed with International Financial Reporting Standards, which Spain adopted several years ago along with the rest of Europe. European Union officials knew this and let Spain proceed with its own brand of accounting anyway.

Click here for reuse options!
Copyright 2012 The National Memo
  • Why do I suspect Tim Geithner is not included?

    • ObozoMustGo

      Nice horse, Larry!

  • ObozoMustGo

    Jonathan Weil, you are not being totally honest in this article, and you know it. Missing in your blast of the banks is the dirty little secret that defies your leftist ideology. That is, the loans that are going bad for the banks are THE SOVEREIGN DEBTS! The government bonds they own are finally having to be written down to reflect something near market value. I will say this loud and clear for all who are reading this:


    Do all of you understand what I just wrote? That’s right. The politicians wanted to set up the rules of the game so that they would benefit and no one would know it while they continued to heap on debt after debt after debt for their countries. It’s regulators that screwed the pooch here, not the banks. They’re just doing as told.

    The banks are not without fault, however. They’re the ones who were stupid enough to keep lending to the stupid politicians who keep running up the debts. Too bad for all, isnt it?

    Have a nice day!

    • DurdyDawg

      Although the ‘leftist’ shot was (a bit) uncalled for.. Your post was refreshingly both honest and informative bozo. Though it would probably never be sought out and proven, I was believing every word.

      • ObozoMustGo

        Yo Dawg! How’s it going today, buddy? I trust all is well with you. I am busy.

        What I typed is not a matter of opinion, Dawg. It’s 100% true. If you read this article, the idea that comes across is that the Eurobanks had funny rules that allowed them to NOT reflect the actual market value of the debt instruments that they held. Jon Weil is trying to make a case for tighter regulation without telling you the truth behind the picture he paints.

        This is not the banks’ faults. Politicians and bureaucrats make the rules, not the banks. This rule was actually put in place at the formation of the Euro currency and was a compromise to attract debtor nations and weaker nations into the common currency system. I suppose the rationale was that it would make it easier to transition weak countries if they did not punish them because of their then current financial positions, and that they could raise the money needed to “balance their economy” with the rest of the EU countries. Remember, in order for anyone or any country to issue bonds, the buyers of those bonds (mostly large banks) must be certain that they will get their money back. If the rule is set in place to “hide” the true value of those receivables, this allows them to keep buying more bonds (government debt) without hurting their balance sheets and market valuations.

        Do you get it? It was a rigged game by politicians to skew market forces for their own benefit.

        The problem is that the rules allow the banks to write down their bad loans to governments slowly. So what happens as the government loans the banks have issued become worth less on their books, the bank’s risk profile goes up. As it’s risk profile goes up, it’s ability to continue loaning money goes down. As that ability declines, the cost of the loans (interest rate) that they offer to governments MUST go higher in order to account for risk.

        This is but one of the “tornadoes” that is brewing to tear down the Euro financial system, and at the heart of this calamity is governments that borrow too much money from their future for voter payoffs today. Ultimately, Dawg, the piper’s gotta be paid. Whether it’s for an individual, company, or government. The piper MUST always be paid.

        I hope this helps, Dawg.

        Have a nice day!

        • DurdyDawg

          You make a good case boz but I’m sniffing more assumption on your part otherwise in it’s blatancy even a cave man would realize what these criminals are doing.. In your scenario, these crooks are openly manipulating the system. Now you should realize that although you may be intelligent (and for self-approval, as am I) there would have to be those just as if not more intelligent than us yet you picture them as totally stupid or behind the criminals which makes all g’ments mafiaized .. Thus we keep the crooks (directly or indirectly) employed and totally ignore or even shun advocates that could (by your assumptions) be easily spot and thus oust on their asses yet we keep tolerating their presence by voting them into office according to how much money they can raise. And neither Obama mor Romney is going to be the exception to this rule yet you and your friends tell others to vote this dumb ass (Romney) in and we’ll deal with his corruption after we rid the nation of Obama.. Can’t you see neither is for the progression of America and that’s why you have so much opposition in putting Norquest’s plan into motion. Replacing evil with evil still equals evil and the evil you’ve been fighting for nearly four years will not be any progressive as you continue to fight a different evil for four or even eight more years.. These peckerheads have no plans to get us into the black (or even gray) else they would concentrate on the issues instead of flinging innuendos and mud pies.. Don’t get me wrong, I believe your theory, can ‘smell’ it’s vileness but it being so open and shut, why do we keep voting in idiots who continually sanction the corruption? Maybe if we’d stop allowing faceless moguls to ‘choose’ who we will vote for and find advocates who are honest and responsible then maybe we can save ourselves.. What’s going on today occurred as well in the last years of the roman empire and our last savior was Harry Truman, not because he was a great president but because even with the moguls blatant declaration that he had lost and they had won, he fooled them all which delayed their taking control until after Jimmy Carter. We now have career criminals slithering around our most sacred protection and their molding it into their image. We need another martyr but I don’t think there’s anyone out there who would give their life for their Country.. Sad but true.

          • ObozoMustGo

            Yo Dawg… the article and my writing is about the European Banks and the rules of disclosure of sovereign debt on the Eurobanks’ books. By the way, it is my understanding that the same rules for NOT writing down sovereign debt DID NOT apply to other private market debt. This is why they are in trouble.

            My post had nothing to do with Romney, Obozo, or American politics. That said, I agree that we need another George Washington in America to bring us back from the brink of disaster. Someone with the fortitude of character and integrity that can stand in the face of peril and do the right thing for America, not just the right thing for one group our class of people. Someone that can articulate the principles of our founding and eloquently defend individual liberty and freedom. One exists out there, Dawg. One does exist. Not sure where, or when, but one does exist.

            Have a nice day, buddy!

        • dtgraham

          I’ve read the article over a few more times and I’m not getting some of your points. All of Europe was supposed to be subject to rules of the international financial reporting standards which precluded dynamic provisioning. It reads as though it was unique to Spain and was purposely overlooked by MCcreevy. He was biased towards that technique and didn’t realize that their banks weren’t in the shape that their statements showed. It doesn’t say anything about banks being able to use dynamic provisioning and appears to say the opposite. It never mentions certain nations being allowed to use this accounting method to ease their transition to the Euro. If that was the case, they must have changed the rules around 2004 or earlier.

          The article gets a little murky in places, but that’s what I get out of it.

  • howa4x

    Look for goldman-saks somewhere in this

  • dtgraham

    It sounds like just an egregious lack of judgement and oversight by Charlie McCreevy. So, who’s holding him to account. I wasn’t familiar with dynamic provisioning but it appears to be breaking IFRS rules (which it has) and GAAP fund rules by wrongfully capitalizing certain revenue streams and assigning their costs to future periods, thus overstating present bank assets and future net income via overstating future expenses.

    I’m assuming that the Bank of Spain is controlled by Madrid. If so, I’m extremely surprised that the Spanish government encouraged this. Even in that case, it’s still a lack of enforced regulations by an agreed upon, higher continental authority. Whether the bank of Spain honestly thought they were on to something, or whether there was something else involved, is hard to say. Obozo’s government-banking-spending conspiracy is too hard to swallow, given that these rules weren’t broken elsewhere and certain other countries’ bureaucrats encouraged, and enforced, strict rules on their banks. Look at the nations with strict banking regulations that don’t allow investment banks, commercial banks, and insurance companies to merge. They came through 2008 with hardly a scratch.

    The Greek government has been corrupt for a long time, but government bureaucrats aren’t the reason why we are where we are today. This started in the United States and has spread out into the financial sector elsewhere. Wall St fought for deregulation, the end of Glass-Steagall, the merger of services that shouldn’t be merged, and fought to allow them to sell worthless products without proper regulation. It’s the United State’s congress that’s regulated by Wall Street’s lobbying and campaign contributions. They bribed us into a recession and now Romney says the solution is to deregulate them even more. Wall street’s financial institutions need to stop being the largest gambling casino in the world and start investing more in the productive economy.

    • William Deutschlander

      Obozo’s government – banking – spending conspiracy!

      First and foremost, When President Obama and his Administration took office on Jan 20,2009 the Republican portion of the U S Nat’l Debt was 9 Trillion and the Democrat portion of the U S Nat’l Debt was 1.5 Trillion, Admittedly that is only the Nat’l Debt that is Transparent or published.

      The Obama Admin IMMEDIATELY WAS FORCED TO BORROW 5 Trillion more, to pull the U S A and the WORLD out of the DOWNWARD SPIRALING VICIOUS ECONOMIC DISASTER that 2000 thru 2008 THRUST OUR ECONOMY INTO!!!!!!!!

      Thank you Obama Admin. for saving us ALL FROM ECONOMIC RUIN caused by the REPUBLICAN MALFEASANCE and LACK of FIDUCIARY DUTY!

      At the end of 2012 the U S Gov’t. will require that the Nat’l. Debt to be raised to 17 Trillion. If you can be honest and do some simplr arithmetic, 9 Trillion plus 5 Trillion equals 14 Trillion of Nat’l. Debt attributed to Republican Leadership. If you then subtract 14 Trillion from 17 Trillion you get 3 Trillion attributed to Democratic Leadership.


      On top of that we should, according to you, put Romney in charge, a KNOW FINANCIAL PREDATOR, WHO REMOVES CAPITAL from the U S A and deposits it personally in overseas bank institutions. WHY don’t we let the MAFIA take over, at least they are open and honest that they will steal from whomever!!!!!!!!!!!!!!!!!!!!

      • dtgraham

        William, I turned on TV the other day and was watching for a few minutes. I was thinking to myself, great, I thought Lovetrap wasn’t supposed to be on for another hour. Then, I eventually realized that I was actually watching Republican lawmakers falling madly in love with Jamie Dimon, which seemed almost as good, in a perverse kind of a way you know.


        • ObozoMustGo

          Hi dt! How are you my Candian socialist friend? I hope you are well.

          2 things:

          1) Nazi Bill’s post to which you replied had nothing to do with the article whatsoever.

          2) Jamie Dimon spends WAAAAYYYY more money on DemocRATS than Republicans. Waaaaayyyyyyy more!

          Just settin the record straight for you, buddy.

          Have a nice day!

          • dtgraham

            Well, not WAAAAYYYY more. 2.8 mill on Obama last election vs 1.9 on Mcain. He’s been changing in recent years to more like 50-50 Dem/Repub. For some reason JP Morgan has been the only Wall St institution that gives more to Dems than Repubs but not by much. All of the others are reversed but, again, not by much.

          • ObozoMustGo

            Hey dt! Did you see the Flyers traded JVR to the Leafs for Luke Schenn? Not a bad trade in my opinion. Both are 22, have been inconsistent, but both have great futures ahead of them. All in all, a fair trade, I think.

            Anyway, JPM isn’t the only firm that was predominantly for Obozo. So was Goldman and many of the others. Of course, after being bashed by Obozo for 4 years, is it really a surprise that they may be reversing their donation trends? Think about it. What would you do if a guy bashed you in the press for 4 years and then asked you for money?

            Hope you are well, dt. Have a nice evening my leftist Canadian buddy! 🙂

          • dtgraham

            That’s a tough one Obozo. Hard to give up a young, high draft pick 6’3″ power forward, for a defenseman, for the Flyers. But young Schenn was the 5th overall draft pick and you’ve got his brother there in Philly……your center Braydon. That just might really do something for his career. I hear they’re really excited to be together. There’s only 1 year of difference in age. I agree. It’s 50-50. Might work out equally for both.

            It’s no surprise that Wall St may be reversing their donation trends somewhat. Don’t look for anything dramatic though. This guy is no Franklin Roosevelt. “I welcome their hatred” has been replaced by ‘I welcome their money’.

      • Thank You !

      • ObozoMustGo

        Hey Nazi Bill… The article is about EUROPEAN BANKS you friggin idiot!

        So even the fantasies and lies you publish above in your post are completely and totally off topic.

        I expect no less from a slack-jawed moron and useful idiot like you, however.

        Have a nice day!

        • Ouch! Name calling (e.g., “nazi”, “moron, “idiot”) of the utmost degree is of course a sign of immaturity, demonstrates a lack of human respect, and is a form of cyber-bullying. If you have something to add that may be helpful to the discussion, please feel free to comment. Otherwise,I suggest that you take a long, hard look in the mirror, and ask yourself: ‘why don’t I have anything valuable to add to this discussion?’

          • ObozoMustGo

            Marc… Nazi Bill is notorious for his inability to understand what is written. That’s all.

            Have a nice day!

  • clarenceswinney

    May it survive Corpocracy and go back to Democracy
    My Solutions
    A. People repeal Corp is a man
    B. Fed Fund Election-Stop two yr campaigns waste of money/ time
    6 months–3 for Primary Campaign–3 For General Campaign
    free equal tv time-provided by “our” tv airwaves
    One Debate a week. That is 12 And is adequate to evaluate candidates,
    This stops need to raise campaign funds. Congress nd White House can stay on the job instead of constant traveling to raise funds. Restrict outside campaign funds.

    C. Since there is no need for campaign funds BAN members of the government from receiving anything with a financial value current or future promises. Stop the bribing by Lobbyists.

    D. Progressive Flat Tax By Group-we have a $14,000 income a 3800B budget yet rank #2 in oecd nationas as lowest taxed. We refuse to tax wealth enough to pay our way.
    Top 50% get 87% (agi) of Income and pay 13/5% Tax Rate.
    Bottom 50% or 70,000,000 workers get 13% not enough to pay much in taxes.
    They pay a greater percent of that Income in payroll- state-local taxes than many top incomes.
    It has been a disgrace that top ceos can get enormous increases in pay and many of 70,000,000 cannot get an increase in the minimum wage to better their standard of living.
    In A Christian nation I often wonder what Jesus Christ would say to us?
    E. Tax Book–burn that sucker. start anew. Any request for an exemption be televised so the public can watch attempts at bribery. It is so sad that in 2011 corporations with record profits pay a 12.1% Tax Rate for second lowest in oecd nations. It is sad when we borrow $1300B
    with a $14,000B Income because we tax only $2300B or 16.4% Tax Rate yet top income had huge increases. Job Creators=lowest since Hoover while rich got ultra rich and masses borrowed to keep a decent standard of living. While top 10% gained to 73% of Net Wealth–to 83% of Financial Wealth and got 50% of individual income. While 70,000,000 got 13% of income.

  • Don

    America’s cookie jar is up to each American, not the man on top Obama. He cannot get the job you want. I never asked the government to help me get the job. I went out and did it myself. I sent the resumes, went to the interview, and got the job. With God’s help it came thru, so Americ it is up to you to get your cookie jar filled to overflowing.

  • Your article implies that Spanish banks used larger than required loan loss reserves during good times in order to cushion the blow to the balance sheet in bad times. This can be a form of fiscal conservancy IF bad times are short. Nothing will stop the demise of a national enterprise, such as a national bank, if a recession becomes prolonged to the point it is a depression. Spain now experiences about 25% unemployment. That is a depression. National banks are bankrupt whenever that condition occurs. To state that the Spanish banks’ conservative accounting practices are to blame for their present fiscal demise is in an error with a huge degree of magnitude. The blame rests with Central Banks in Europe and throughout the world, as well as the sovereign states, which have created the present Great Recession through contagion and their misguided policies.