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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: The Vet who wrote (87928)	9/2/2007 6:50:06 PM
From: RockyBalboa	Respond to of 306849

Vet, what you both address, is consisting of two (or 3) things: net capital requirements. They are laid down in the Capital Adequacy Directives also known as the BIS accord. They basically state that a bank has to maintain a minimum equity to support lending. There are special rules which reduce the weighting of cash, treasuries and bank paper to 0%-20% where a commercial loan has upto 100% weight. The rules essentially limit the asset base and the maximum leverage. For simplicity lets assume total equity of 1B and 8% equity requirement (this was the requirement for loans in the old rule). How much can the bank lend? 12.5B, provided they have deposits and bank lines supplying the necessary liquidity. (In companies,like IMB or CFC you will find a similar leverage). ifrs rules: Now, consider 500MM of the loans are behind schedule seriously. After 90 days the lender has to do something: stop accruing interest income, and more importantly book a loan provision. Assume a loss of 20%, so the provision is an expense of 100MM. This directly reduces equity by this amount, leaving 900MM, now only supports: 11.25B in loans. That means that the poor lender has to get rid of 1.25B in loans, essentially reducing his balance sheet or (if its a thrift), by putting the proceeds from (good) loan sales into Treasuries. In both cases the interest margin and profitability of the bank is reduced. *liquidity aspects.., and trust: Those are issues with have less to do with the sliver of equity (capital+retained earnings). Nonperforming loans also alter the liquidity as they aren´t prepaid as usual and the lender´s planned schedules may no longer work, resulting in extraordinary borrowing -see CFC. And if problems are then made known in public, both customers want to withdraw savings, and/or existing interbank lines are revoked...compounding the problems.

To: The Vet who wrote (87928)	9/2/2007 6:59:19 PM
From: John McCarthy	Read Replies (1) \| Respond to of 306849

Hi Vet You make a strong case and one that I cannot see thru. Whats bothering my brain is the 500k loan. On *somebody's books there has got to be a debit/credit along these lines .... Debit Asset Account - Mortgage - 500,000 Credit Liability Account - $ Created to give Mortgage Holder In a brief google I get the sense that if we got back to our original 50k of depositor money the game runs like this Bank keeps 10% or 5k Federal Reserve gets 90% or 45k Once thats done - the bank is free to lend 10 * 50k .... And YES I could be misunderstanding the above also. Somehow I think but cannot get there .... that once the mortage holder goes bankrupt and pays back nothing (just to simplify) - the bank is in HOCK to the Fed for 500k - 45k and can no longer make loans. But - clearly - I am lost within this subject matter. So I had better SHUT-UP and listen more than talk. regards, John lewrockwell.com en.wikipedia.org