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In July 1990, the U.S. federal regulators ordered U.S. banks to write off 20% of their $11.1 billion in loans to Brazil, and 20% of their $2.9 billion in loans to Argentina. The action significantly affected the loan loss reserves—that is, allowance for bad debts—of the banks. For example, Citicorp was ordered to write off loans totaling $780 million, compared to Citicorp’s total loan loss reserve of $3.3 billion. However, it was reported that the write-off would not automatically have an impact on bank earnings.
Prepare a detailed report answering the following questions:
Why won’t the ordered write-offs from 1990 automatically impact earnings?
Might the ordered write-offs have an indirect impact on future earnings?
What will be the effects of the 2009 write-offs on banks’ books?
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?
Your well-written paper must be two to three pages in length, in addition to the title and reference pages, and be formatted according to the CSU-Global Guide to Writing and APA Requirements. Cite at least three peer-reviewed sources, in addition to the required readings for this module.
Source: 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:r
In July 1990, the U.S. federal regulators ordered U.S. banks to write off 20% of their $11.1 billion in loans to Brazil, and 20% of their $2.9 billion in loans to Argentina. The action significantly affected the loan loss reserves—that is, allowance for bad debts—of the banks.