The Dynamics of Undisclosed Insolvency

Abstract

1. International experience tells us that banks tend not to disclose the reality of their solvency and results when they find themselves in trouble, resorting instead to creative accounting to keep up appearances. The result is that the general public, analysts, rating agencies and often enough even external auditors and supervisors remain blissfully unaware of their true situation, sometimes for years.

Undisclosed insolvency veiled in the accounts by cosmetic practices and borrowed liquidity is rampant, a reality that can have devastating effects for bankers, supervisors and the taxpayer alike.

A. de Juan

Excerpt from an article published in 2005 in Revista de Temas Financieras, a journal published by the Superintendencia de Banca del Perú, the Peruvian bank regulator. Jaime Caruana, then Governor of the Bank of Spain, published an article on Basel II in the same issue.