Why are more and more financial institutions announcing their 1st quarterly results in profits? Consider: International Monetary Fund (IMF) and World Bank are still issuing warnings of a severe recession. Global growth projection remains around 1.3%. Hunger of population is likely to surge beyond one billion and this year another 90 million are likely to slip into the poverty column.
So, it looks like an accounting gimmick. The modification by the Financial Accounting Standards Board (FASB) allows banks to "Mark to Market" at the required value and not at distress sale. This artificial change in accounting rules will help, albeit temporarily, banks' balance sheet look stronger.
Interestingly, the market is waiting to know the outcome of "stress test", as many are terming the day of announcement as "Judgement Day". The exercise is to determine whether the banks have sufficient capital to successfully weather this storm. It is likely to look into two possible scenarios. One is 'baseline scenario', which could help in ascertaining the damage to a lesser extent, such as the impact after modifying the accounting rules while the other scenario - more adverse scenario - could be extremely damaging though result-oriented, as it could be more helpful in getting closer to the reality.
The FED has indicated that banks may require New Capital, also known as (CAP or Capital Assistance Program) or Cash, as the Capital of USA's 19 largest banks (with bank asset value of USD 100 billion and above) may have reduced substantially. CAP would ensure that there is enough capital available for smooth running of the economy. As many as over 150 supervisors representing the FED, FDIC and scores of independent economists are painstakingly working on "stress test".
The results of 19 banks that hold two-thirds of the assets and one-half of the loans of US banking system will be known initially, while the results of the remaining banks will be announced at a later stage. The conclusion is that no matter whatever steps are taken to overcome the financial crisis, the possibility of another round of bankruptcies cannot be ruled out unless the true quantum of losses is objectively ascertained and realised and sufficient capital is injected into the system.
(The writer is a former bank treasurer.)