The financial system must recognise losses and move on, hopefully with the biggest and most solvent institutions taking over the weaker ones.
Credit Suisse and Goldman Sachs, which mark most of their balance-sheets to market and hence recognise losses early, are already running with core capital ratios of 10-12%.
They would choose the course giving the lender the highest return.However, forcing banks to recognise losses would erode their capital.
And some projects, once under way, are worth finishing even if they were not worth starting.Loan rollovers give banks time to earn their way out of trouble, setting aside profits from good loans before they recognise losses on bad ones.
Until recently, the banks found it more expedient to roll over loans to insolvent borrowers rather than recognise losses, which would require them to increase their capital in order to meet regulatory requirements.
Bankers say that in a downturn fair-value accounting forces them all to recognise losses at the same time, impairing their capital and triggering firesales of assets, which in turn drives prices and valuations down even more.
Different firms may hold identical assets at different prices, and recognise losses on them in several ways.Into the mayhem has stepped the International Accounting Standards Board (IASB), which sets the rules in most of Europe and Asia and is eventually expected to have authority in America, too.
This view was reinforced by laws that made it impossible to send profits from foreign subsidiaries back to Brazil or to recognise losses made abroad in company accounts.This change in attitude has helped, but Brazilian multinationals are not immune to the kind of problems that have sometimes caught out foreign investors in Brazil.
There are also several different ways of recognising losses.
Banks do not mind all that much since it allows them to put off recognising losses.
