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They would choose the course giving the lender the highest return.However, forcing banks to recognise losses would erode their capital.
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%.
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.
Similar(52)
English law does not recognise loss of a chance in personal injury actions and causation is decided on the balance of probabilities (Gregg v Scott).
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.
These gave banks more freedom to use models to value illiquid assets and more flexibility in recognising losses on long-term assets in their income statements.
America has a more transparent regulatory structure which presses banks into recognising losses and repairing their balance-sheets even if regulators were slow to recognise that the balance-sheets even rifky securegulatorssets off their balance-sheets in the first place.
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Justyna Jupowicz-Kozak
CEO of Professional Science Editing for Scientists @ prosciediting.com