Tuesday, March 25, 2008

Games Banks Play - Number One

Over the next couple of years, many banks will fail and be taken over by the government or larger institutions. This will be an agonizing process that some banks will try to avoid at any cost. I will explain in a multi part series what to watch out for:

Delaying recognition of non accrual loans - Banks are required to put loans into non accrual status when full repayment of interest and principal is not expected, or when loans become 90 days or more delinquent. Some institutions will convince themselves that repayment of interest and principal is still possible and delay putting these loans into non performing status. Some loans should be put in non accrual much earlier than 90 days based on observations and facts that the banks recognize.

Obviously, it is hard to detect these shenanigans, but one should be aware anyway.

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