SK in CV makes relevant points, but alas, the devil is in the details. Yes, theoretically banks build up specific reserves (via provisioning) on delinquent loans as these loans move through the credit quality “buckets” (pass>watch list>substandard>doubtful>loss), but… some banks play games with both the appraisals and the required reserves. Regulators provide “guidelines” on these issues but there are no hard and fast rules. So, games can be played because banks have some discretion where these issues are concerned. It is much more difficult to play these games today, however, than it was in 2008, for instance, because both the auditors and regulators (both imperfect) are much less tolerant today than they were a few years ago.
