This irritates me. While it makes sense to keep some ‘performing’ loans from being written down, it ignores the second largest underwriting parameter – LTV.
I relate it to the stated-income loans of the residential boom. “Don’t worry about the borrower’s cash flow ability, the home will be worth more and the Bank will be fine!” Only this time it’s “don’t worry about our collateral position, the cash flow is fine!”
I think the Banks need to face reality about what their loan portfolios are truly made of (both from a cash flow and collateral coverage POV) and reserve accordingly.
