Beginning to make more sense now. Why investors initially complained that International Financial Reporting Standards were causing banks to recognize losses too quickly and then, after this was changed, complained that International Financial Reporting Standards caused banks to recognize losses too late.

What investors seemed to be relying on was continuing government support, so long as the banks appeared to be solvent, at least in accounting sense, where assets measured for accounting purposes–particularly the loan portfolios of banks–exceeded liabilities. The bank could be insolvent in fact, though what mattered was the appearance of solvency, assisted by related accounting provisions. Few governments could justify further infusions of cash to a bank that was insolvent both in fact and in appearance. Plus, if the government is a fellow shareholder, how can one lose? Investors simply assuming that governments would guaranty a bank’s continued existence.

This was a bet in relation to future government conduct. Bet was not successful.

Came across a Wall Street Journal article from September 17, 2013 (at p. C3), “U.K. Set to Begin Exit from Lloyds” by Max Colchester and Margot Patrick, in relation to the sale by government-run UK Financial Investments Ltd. of shares of Lloyds Banking Group, with added bolding:

But this government still has a long way to go before it will rid itself of its stakes in the U.K.’s biggest banks. In 2008 and 2009, the government pumped more than £100 billion into its banking sector. The bailouts left taxpayers holding 81% of Royal Bank of Scotland Group PLC as well as the Lloyds stake [39%]. The government also set up a “bad bank” entity that houses bad loans made by now defunct banks.

The road back to privatization has proved tortuous. The U.K. government didn’t aggressively recapitalize Lloyds and RBS. Instead, the banks shed hundreds of billions of pounds in assets–incurring sizable losses in the process, according to bank executives and analysts…

Lloyds has returned to profitability, and its shares have rallied, making it one of Europe’s biggest banks by market capitalization…

Investors expected that the deferral of losses from an accounting perspective would result in a continuing deferral in reality, plus more government money being pumped into the banks. Instead, the government chose to realize the losses. Now the investors blame the International Accounting Standards Board for not forcing the earlier recognition of the losses, asserting that they surely would have sold their shares earlier, had they known. Or had they not lost their bet as to government action, being the more persuasive explanation?

Well, in terms of later developments and increases in share prices…

About brucelarochelle
This entry was posted in Financial Institution Failures, Financial Institutions, Financial Institutions - International, Great Britain, International Accounting Standards. Bookmark the permalink.

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