Some events are as predictable as the sunrise. Sure enough, Bloomberg’s accounting scold, Jonathan Weil, has taken to carping that banks’ earnings lately are of “low-quality” or worse because–and you hear this every cycle–they contain a significant amount of loan-loss reserve releases. He’s just sure he’s on to something. Commenting on a recent a speech by OCC head Thomas Curry, Weil writes that “[Curry] cautioned that some banks seemed to have been ‘scrimping on their allowances against their loan losses,’ which is a fancy way of saying they are fudging their numbers.”
Oh, please. First, I don’t recall Weil or anyone else complaining in 2008 and 2009 that the big reserve additions the banks were booking at the time meant that the resulting reported losses were somehow not real. Come to think of it, my recollection is that the Jonathan Weils of the world took those mid-crisis loss-reserve additions as evidence the banking industry was at risk of collapse. Which, in fact, it was. Five years on, we now know that that banks over-reserved at the bottom the way they always do, and are making adjustments. As I say, it happens every cycle.
More to the point, if Weil believes the problem is bad as Curry seems to think (“fudging their numbers”!), why doesn’t simply pontificate that Curry should do his job and tell the banks to cut out the monkey business. Curry is the Comptroller of the Currency! Bossing banks around is what he does.
Except that on this issue, the regulators will stand pat. Reason: banks have a lot less discretion in setting (or releasing) their reserves than most people, even Bloomberg columnists, seem to realize. The accounting rules on reserving are pretty clear, and don’t leave a lot of wiggle room. Meanwhile, I’ve never quite understood what people mean when they say that certain types of earnings are “low-quality.” One hundred cents on the dollar counts as 100 cents on the dollar, after all. And considering what the banking business was going through when those reserve additions were put on the books, their release now should be seen as something of a triumph. But number-fudging? No way.
What do you think? Let me know!