Financial Crisis Accounting - Bank Losses

Quanta Analytics(Now Working for Verdi Consulting)

Financial Crisis AccountingPart I

Banking Industry Losses

Introduction to Banking Analysis

There are many myths surrounding the “banking industry” as it relates to the current Great Recession that we have been living through. In that regard, the banking analysis provided herein is an attempt to bring clarity and reason to what really has taken place in the banking environment

over the last several years.

The financial information appearing in this presentation is obtained primarily from the Federal Financial Institution Examination Council (FFIEC) Call Reports and the Office of Thrift Supervision

(OTS) Thrift Financial Reports submitted by all FDIC-insured depository institutions. All data presented reflect the highest level of consolidation (e.g., domestic and foreign operations). This information is stored on and retrieved from the FDIC's Research Information System database.

Crisis Accounting

Analysis of Banking Industry Losses

Quanta Analytics;(now working for Verdi Quanta Analytics;(now working for Verdi Consulting)Consulting)

Banking Industry Pre-Tax Net IncomeBanking Industry Pre-Tax Net Income(2000 – 2010)(2000 – 2010)


Crisis Accounting Showing Bank Losses By Looking at Pre-Tax Net Income

The First View

The previous graph shows the pre-tax net income for the banking industry from 2000 through 2011 (with 2011 net income annualized using the first nine months of the year results).

Using the $210 Billion figure of 2006 as a Reasonable Benchmark for pre-tax net income that would have otherwise been expected without a crisis—then the bank losses associated with the “Great Financial Crisis” calculate out to be:

2007 $210 - $150 = $ 60 Billion

2008 $210 - $ 20 = $ 190 Billion

2009 $210 - $ 0 = $ 210 Billion

2010 $210 - $115 = $ 85 Billion

2011 $210 - $170 = $ 40 Billion

TOTAL BANK LOSSES = $ 585 Billion


Banking IndustryBanking IndustryProvision for Losses as Part of Net IncomeProvision for Losses as Part of Net Income

(2000 – 2010)(2000 – 2010)


Crisis AccountingShowing Bank Losses by Looking at Provision for Losses

The Second View

The previous graph will be used to calculate bank losses in a second different way by looking at the Provision for Losses in the income statement that are accounted for each year.

In this case, using the $30 Billion amount in 2006 as a pre-crisis benchmark for Provision for losses, the accounting shows:

2007 ($ 70 - $ 30) = $ 40 Billion

2008 ($175 - $30) = $ 145 Billion

2009 ($250 - $30) = $ 220 Billion

2010 ($160 - $30) = $ 130 Billion

2011 ($ 80 - $30) = $ 50 Billion

TOTAL BANK LOSSES = $ 585 Billion


Bank Industry History of Loan Net ChargeoffsBank Industry History of Loan Net Chargeoffs(2000 – 2010)(2000 – 2010)


Banking IndustryBanking IndustryLoan Loss Allowances on Balance SheetLoan Loss Allowances on Balance Sheet

(2000 – 2010)(2000 – 2010)


Crisis AccountingShowing Bank Losses By Looking at Net Chargeoffs and Loan Loss Allowances

The Third View

The previous two graphs showed the amount of assets that the banks have already written off the books (net chargeoffs) and the amount that has been subtracted from their current asset balance as loan loss allowances (LLA) for current Nonperforming Assets (NPAs) still on the books.

Again, using previous crisis data somewhat as a benchmark, and thus $30 billion (2006 amount) as an expected future amount for net chargeoffs we can estimate losses in a third different way:

2007 ($ 45 - $ 30) = $ 15 Billion in New Unexpected Net Chargeoffs 2008 ($100 - $ 30) = $ 70 Billion in New Unexpected Net Chargeoffs 2009 ($190 - $ 30) = $ 160 Billion in New Unexpected Net Chargeoffs 2010 ($190 - $ 30) = $ 160 Billion in New Unexpected Net Chargeoffs 2011 ($ 90 - $ 30) = $ 60 Billion in New Unexpected Net Chargeoffs

Total New Unexpected Net Chargeoffs = $ 465 Billion already written off the balance sheet

Now if you add to that number the 2011/2006 Change in Loan Loss Allowances (LLA) on the Balance Sheet, then guess what?

($197 - $ 77) = $ 120 Billion for future losses associated with current NPA TOTAL BANK LOSSES = $ 585 Billion


Well, uh, okay…I See What You Are SayingBut Haven’t You Forgotten Something?

What About Future Bank Losses?

Now let me answer your very good question in this manner.

Currently, as the next graph will show you, the amount of Bank Assets that are still (1) on the books and (2) non-performing is made up of the following:

Non performing assets < 90 days delinquent = $ 100 Billion

Non performing assets > 90 days delinquent = $ 120 Billion

and Non performing assets in the foreclosure process = $ 190 Billion

TOTAL NON PERFORMING BANK ASSETS (NPA) = $ 410 Billion

When considering losses associated with these NPA’s you must remember, however, that:

(1) As we noted from an earlier graph and our third method of evaluation, the banks have already set aside (and accounted for) $200 Billion worth of losses associated with the NPAs;

(2) Some non performing assets do in fact return to a performing status;

(3) Non performing assets do usually in fact retain some of their value; and

(4) The NPA graph shows that we are four years into our crisis and NPA’s are actually declining.

So regardless of how much one wants to be a doomsayer, once you factor in all four of the above, you can conclude that the worst is over and the Banks have already accounted for most of the losses associated with this Great Banking Crisis—both in the past and in the future.


Amount of All Banking Industry Non-Performing AssetsAmount of All Banking Industry Non-Performing Assets30 – 90 days , > 90 days, & in Foreclosure or Nonaccruing30 – 90 days , > 90 days, & in Foreclosure or Nonaccruing

(2000 – 2010)(2000 – 2010)


So if the banks lost $585 BillionHow did these losses effect their bottom line?

Or in other words, their Equity

Another good question, old wise one. The answer is actually—hardly at all.

The next graph will show you the Banking Industry Equity looking at it from two different perspectives:

(1) Equity as reported and equal to: Total Assets Less Total Liabilities

(2) Equity adjusted to account for an extreme case where all current Nonperforming Assets go belly-up and none of the NPAs retain any value. In this case Equity is calculated in the following manner:

Equity as Shown by Assets Less Liabilities

Less All NonPerforming Assets (NPAs)

Plus the Amount of Loan Loss Allowances (LLA)


Banking Industry EquityBanking Industry EquityTwo ViewsTwo Views


Wow, I Think I Hear You, But I Still Cannot Believe What I Think You Are Trying to Tell Me.

Are You Saying That There Is No More Beef than $585 Billion to the Banking Crisis?

Well, yes and no. Now how is that for an answer.

Yes, I am telling you $585 Billion is the Bill the Banks Have Had to Pay for their significant role in the financial debacle.

But no, there is more to the crisis than just the banks. Don’t forget the Government’s portion (i.e., Fannie, Freddie, the FDIC, AIG Bailout, etc.).

You also have to take into account all the Household Equity that was lost as a result of the PANIC, including losses from stocks, bonds, and home devaluation.

But I am saying much of that lost wealth will come back when people realize that things might not be as bad as the doomsayers would like you to believe.

In other words, let’s move on and fix our real problems and quit worrying about the banks, foreclosures, and other things that mostly already have been taken care of.


Banking Industry Equity to Asset RatioBanking Industry Equity to Asset RatioTwo ViewsTwo Views


How the Banking Industry Paid Their $585 Billion Bill

Since we have gone to all the trouble of explaining the bill the Banking Industry had to pay for the misguided activities, it is also probably worthwhile to explain how the Banking Industry paid the bill—and doing so without greatly affecting Bank Equity.

The following graphs will pretty much tell the story.

We will be using the Banking Industry’s composite Income Statement to look at:

(1) Interest Income Less Interest Expense;

(2) Dividends Paid to Stockholders; and

(3) Taxes Paid

I believe you will find this quite interesting


History of Banking Industry Net Interest IncomeHistory of Banking Industry Net Interest IncomeInterest Income Less Interest ExpenseInterest Income Less Interest Expense


Banking Industry Interest IncomeInterest Income Less Interest Expense

One source of income for the Banking Industry is the interest rate spread between what they borrow their money at (or the rate the pay depositors for holding their money) and the rate which they charge borrowers to use that same money.

The banking industry accounts for this in two different accounts: (1) an interest income account and (2) an interest expense account.

Part of the way the Banking Industry paid for their $585 Bill was to take a larger spread on the interest rate they borrowed versus the interest rate they lent. Like before, using the 2006 Benchmark number of $330 Billion for interest income from the previous graph, we see:

2007 ($353 - $330) = $ 23 Billion increase in net interest income



2010 ($430 - $330) = $100 Billion increase in net interest income


Total Industry Net Interest Income Increase = $ 305 Billion


History of Banking IndustryHistory of Banking IndustryDividends to StockholdersDividends to Stockholders


Banking Industry HistoryDividends to Stockholders

The banking industry has a history of paying out Dividends to the stockholders (or owners) of the banks.

So considering that these owners are partly responsible for the misguided activities of the banks themselves, most wise bank executives feel that it is only fair that they should pay some of the bill. And they have:

Again, using the 2006 Dividend figure ($110 Billion) from the previous graph as a benchmark, then the part of the $585 Billion banking bill paid by the stockholders is:

2007 ($110 - $110) = $ 0 Billion

2008 ($110 - $ 51) = $ 59 Billion

2009 ($110 - $ 47) = $ 63 Billion

2010 ($110 - $ 54) = $ 56 Billion

2011 ($110 - $ 75) = $ 35 Billion

Smaller Amount of Dividends to Stockholders = $203 Billion


Banking Industry HistoryBanking Industry Historyof Taxes Paidof Taxes Paid


Banking Industry Historyof Taxes Paid

Well, of course if the banking industry made less pre-tax net income as a result of their misguided ways (refer back to earlier graphs which we used to show pre-tax net income to calculate losses), it also means that they paid less “taxes” on their income.

Again, using the $68 Billion (2006 figure from the previous graph) as a pre-crisis benchmark for taxes, we see that

2007 ($ 68 - $ 46) = $ 22 Billion less taxes paid





Total Amount of Less Taxes Paid = $188 Billion less taxes paid


So Totaling Everything UpWe Find

Now if we total our previous findings up, it should pretty well explain why Banking Industry Equity was affected very little and even rose during this crisis:

Passing less of the interest spread to their customers: $305 Billion

Distributing less Dividends to stockholder/owners: $203 Billion

Paying Fewer Taxes to the Government: $188 Billion

TOTAL For THE ABOVE THREE: $696 Billion

Interesting—isn’t it?

Who Said Bankers Were Stupid?

Just in Case You Are Curious

We Will Use Our Same Methodology Now to Look at

Banking Industry Salaries and Benefits


History of Bank Industry Expenses to CoverHistory of Bank Industry Expenses to CoverEmployee Salaries and BenefitsEmployee Salaries and Benefits


History of Banking Industry Expenses to CoverEmployee Salaries, Benefits and Bonuses

The previous graph showed the amount of banking industry expenses needed to cover employee salaries, benefits, and , bonuses to executive management.

Once again, using our benchmark methodology (and thus a $151 Billion for a 2006 pre-crisis salaries/benefits) the following table shows how those expenses have changed as a result of the Banking Financial Crisis:

2007 ($160 - $151) = $ 9 Billion increase in salaries/benefits





Change in Salaries/Benefits to Employees = $ 65 Billion increase in salaries/benefits

I know this is a “cheap shot” and that the Banking Industry does need to keep

Operating As Smartly, Efficiently, and Effectively

As They Have in the Past

Keep in Mind: “Good Help and Smart Operators Do Not Come Cheap”

That’s All Folks!!!

(at least for a little while)

Financial Crisis Accounting - Bank Losses

Economy & Finance

Transcript of Financial Crisis Accounting - Bank Losses