No, it doesn't work like that. The financial asset remains.
Only if the debt is written off or written down then the corresponding financial asset is written off or written down.
That's how you get zombie banks. Assets marked to book value, but their market value makes them insolvent.
There is always the possibility that APRA requires the banks to re-mark the underlying security to market, re-weighting the asset (loan) for the new risk level, requiring the bank to hold extra capital. Then the asset value, less the cost of capital is the net value of the asset across the whole balance sheet.
Back in the day, if the cost of reserve capital was greater than the value of the asset, the loan would be wound up and any losses written off. In the modern age, doing that would bring down the whole financial system. The loan creates the deposit, and the default destroys it.
Speak when you are angry and you will make the best speech you will ever regret. Ambrose Bierce
That's how you get zombie banks. Assets marked to book value, but their market value makes them insolvent.
There is always the possibility that APRA requires the banks to re-mark the underlying security to market, re-weighting the asset (loan) for the new risk level, requiring the bank to hold extra capital. Then the asset value, less the cost of capital is the net value of the asset across the whole balance sheet.
Back in the day, if the cost of reserve capital was greater than the value of the asset, the loan would be wound up and any losses written off. In the modern age, doing that would bring down the whole financial system. The loan creates the deposit, and the default destroys it.
A write off destroys it.
Simon_S
21 Nov 2016, 10:49 PM
So Your saying Assets do not fall in a Recession or Depression or Crises............<br /><br />So that's never happened......<br /><br />Dementia must be really setting in fast.....<br />
You're out of your depth. Don't embarrass yourself.
No, the default destroys it. In the event of a default the security is sold and the asset (loan) and liability (deposit) are both destroyed. Even if the recovery is 100%, the asset and the liability are both destroyed when it is wound up.
A write off would be an abnormal loss.
Terry
21 Nov 2016, 11:25 PM
Yes, the whole crux of the Japanese banking woes of the 90s and the ultimate demise of the Long Term Credit Bank.
The theory is that increasing the money supply creates inflation and decreasing the money supply creates deflation. Winding up those loans would have contracted the money supply and caused deflation. Luckily the BoJ listened to wiser heads in the West and Zombified their banks, avoiding two decades of deflation.
No, the default destroys it. In the event of a default the security is sold and the asset (loan) and liability (deposit) are both destroyed. Even if the recovery is 100%, the asset and the liability are both destroyed when it is wound up.
A write off would be an abnormal loss.
Me gut instinct in combination wif about 8 yrs of askin' meself wot tha f***'s goin' on, inclines me ta run wif that disclaimer ya got whacked in as ya siggy right about now.
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