Thursday, July 09, 2009

Cash Flow: a Better Way to Know Your Bank? - -

On the first week of almost any introductory finance class the professor will begin off the lecture with a discussion of why cash flow matters more than accounting based numbers that depend on assumptions and choices that are often influenced by agency cost problems and a desire to abide by various loan covenants and even public opinion. Depending on the class, the discussion might then explain the difficulties in actually getting cash flow numbers.

The following piece by focuses on this exact problem in banking and finds, sure enough, that accounting differences from bank to bank make comparisons difficult.

Cash Flow: a Better Way to Know Your Bank? - -
"If banks more consistently accounted for their operating cash flow, companies could gain a better grasp of their commercial banks' financial health, two professors suggest in a report to be released later this week.

The results would be astoundingly different than what financial institutions' statements of cash flows tell us today. In the course of an attempt to make the firms' cash-flow reports more comparable - which entailed several adjustments to how banks classified their investments, accounted for non-cash transfers of their loans, and recorded cash flow from acquisitions last year - the researchers saw huge swings, both downward (Bank of America) and upward (KeyCorp)."

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