Dear SAP Banking Community members,
Once upon a time, there was a Southern European Country suffering the burst of a Real Estate bubble.
One small bank on that country had a huge credit exposure on Real Estate companies which the bank executives knew were going to default very soon.
As they knew, the solvency regulation in the country makes them recognize losses by generating provisions for the impaired loans.
That would be a very bad thing”, one of the executives said,
“If we have to recognize losses, we will not be able of giving dividends to our shareholders, and even worse, we’ll not be able of getting our bonus”.
A smart executive thought, I have the solution; “As most of the loans are covered with real estate collaterals, we’ll accept the collateral in exchange for the debt and we will cancel the loan, so we will not have to recognize the losses”
And they did it.
And month every month the Bank’s balance had more and more Real Estate properties.
So, the banks on that country had so many Real Estate properties in exchange for loans (promised cash-flows) that they started to suffer liquidity problems, and other banks which lend money to our friend’s bank got more and more concerned.
Finally, the regulatory authorities of the country said;
“You’re a bank and not a Real Estate company, and your clients expect cash and not bricks. So as you’re being bad guys I will make you provisioning half of the value of your Real Estate when you keep it for more than one year in your balance”
What will our friends do?
We’ll talk about it next week.
Kindest Regards.
Ferran.
Once upon a time, there was a Southern European Country suffering the burst of a Real Estate bubble.
One small bank on that country had a huge credit exposure on Real Estate companies which the bank executives knew were going to default very soon.
As they knew, the solvency regulation in the country makes them recognize losses by generating provisions for the impaired loans.
That would be a very bad thing”, one of the executives said,
“If we have to recognize losses, we will not be able of giving dividends to our shareholders, and even worse, we’ll not be able of getting our bonus”.
A smart executive thought, I have the solution; “As most of the loans are covered with real estate collaterals, we’ll accept the collateral in exchange for the debt and we will cancel the loan, so we will not have to recognize the losses”
And they did it.
And month every month the Bank’s balance had more and more Real Estate properties.
So, the banks on that country had so many Real Estate properties in exchange for loans (promised cash-flows) that they started to suffer liquidity problems, and other banks which lend money to our friend’s bank got more and more concerned.
Finally, the regulatory authorities of the country said;
“You’re a bank and not a Real Estate company, and your clients expect cash and not bricks. So as you’re being bad guys I will make you provisioning half of the value of your Real Estate when you keep it for more than one year in your balance”
What will our friends do?
We’ll talk about it next week.
Kindest Regards.
Ferran.
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