Why won’t the ordered write-offs from 1990 automatically impact earnings?
The ordered wrote-offs of the debts of Brazil and Argentina in the 1990 were not able to affect the earnings of banks in the United States because it does not mean that the banks are not able to reclaim them ( Admati & Hellwig, 2013) . The banks only considered them to be bad debts written off but there were chances that they could be repaid. Furthermore, the lending banks will be able to benefit from tax deductions from the loans they have given to Brazil and Argentina, thus contributing to the stability of their financial positions.
Might the ordered write-offs have an indirect impact on future earnings?
Bad debts written off may have an impact on the future earnings of a company because they may affect the productivity of assets which are the factors that contribute to the generation of profits. Bad debts written off will also imply that the future tendency of the company to allocate loans to other companies may not be effective and the possible benefits may reduce accordingly ( Giannetti & Simonov, 2013) . Due to low value of assets, it will not be possible to perform various tasks that require the generation of profits according o the potential of the company prior to the writing off of bad debts. Nevertheless, write-offs give a company and opportunity to know the actual value of its assets when some debts that constitute its assets cannot be recovered.
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What will be the effects of the 2009 write-offs on banks’ books?
The effects of bad debts written off by the US banks are that it will reduce the value of their accounts receivables since the debts will be declared unrecoverable. Furthermore, the debts will result into a reduction in the value of the company’s taxable income. The advantage of removal of bad debts from the accounting records of the business is that it will ensure accurate accounting in a manner that explains the actual financial position in case of the need to audit the business creditworthiness ( Hilscher & Raviv, 2014) . Since bad debts written-off are expenses, it will result into a decrease in assets and an increase in expenses.
What effect would you expect to see on the banks’ stock prices in response to the 1990 announcement? What about the write-offs in 2009? Why are your answers in the scenarios different or similar?
The effects of bad debts written off in 1990 due to inability of Brazil and Argentina to repay them are that it will be possible to increase the stock prices since the economy was not affected. Therefore investors will continue to invest in stocks which will increase its net stock value. The impacts of bad debts of Brazil and Argentina that were written off in 2009 is that the stock prices will reduce due to low financial competence of the organization that has written off part of its debts ( Quint, 1990) . Low competitiveness will be brought by factors such as reduction in accounts receivables coupled with inflation that was experienced in 2009. Due to the global financial crisis, it was possible that the value of stocks reduced because trading in them was affected. There was also low possible of regain in bad debts in 2009 because most countries were affected by the financial crisis ( Norris, 2009) . Therefore, the bad debts in 2009 were more likely to reduce the stock prices in 2009 compared with the case of 1990.
References
Admati, A. R., & Hellwig, M. F. (2013). Does debt discipline bankers? An academic myth about bank indebtedness. Rock Center for Corporate Governance at Stanford University Working Paper , (132).
Giannetti, M., & Simonov, A. (2013). On the real effects of bank bailouts: micro evidence from Japan. American Economic Journal: Macroeconomics , 5 (1), 135-167.
Hilscher, J., & Raviv, A. (2014). Bank stability and market discipline: The effect of contingent capital on risk taking and default probability. Journal of Corporate Finance , 29 , 542-560. Quint, M. (1990). Write- off on bank loans due. Retrieved from
http://www.nytimes.com/1990/07/12/business/write-off-on-bank-loans-due.html
Norris, F. (2009). Americans owe less. That’s not all good. Retrieved from
http://www.nytimes.com/2009/12/12/business/economy/12charts.html?module=Search&mabReward=relbias%3Ar
