Is Our Money Safe?

13 Pages 3196 Words

receded this arbitrary date. The same applies to financial statements, which were not inflation-adjusted in high inflation countries. The statements will look inflated and even reflect profits where heavy losses were incurred. “Average amounts” accounting (which makes use of average exchange rates throughout the year) is even more misleading. The only way to truly reflect reality is if the bank were to keep two sets of accounts : one in the local currency and one in USD (or in some other currency of reference). Otherwise, fictitious growth in the asset base (due to inflatio!
n or currency fluctuations) could result.

Another example : in many countries, changes in regulations can greatly effect the financial statements of a bank. In 1996, in Russia, to take an example, the Bank of Russia changed the algorithm for calculating an important banking ratio (the capital to risk weighted assets ratio). Unless a Russian bank restated its previous financial statements accordingly, a sharp change in profitability appeared from nowhere.

The ne...