The trick that turns banking losses into profits

Banks use many accounting tricks to boost profits and fool investors. Tim Bennett reveals one of the biggest, and explains what investors should do about it.

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  • AM

    I am unconvinced that your allegation of sharp practice agaist the banks for their practice of LLP. This is surely just income flow smoothing from year to year. The LLP in year 1 is prudent caution against possible future losses which can be legitimately returned in years 2 and 3 if the losses do not materialise. Clearly the practice could not continue indefinately as in your example the loss provison in year 1 is exhausred by year 3.

  • Tim Bennett

    AM – income smoothing is exactly what I have a problem with. When it comes to making and releasing provisions investors are largely at the mercy of the FD of a bank (auditors do their best but can never possibly know the business as well as he/she does). The businesses I have dealt with (not just banks) overprovide in bad years such as 2008 when no-one cares (since their results will be poor anyway) and release such provisions as their results pick up. You see the same thing with acquisition provisioning/goodwill (to name just one other area). Tim.