Can someone explain how a bank "writes off" debts owed to it?

For example, Citibank the other day announced it was "writing-off" at least $18 billion.

Exactly what does that mean and how would they do it?

in arrears will have the full force of the U.S. government after them to pay income taxes on the amounts written off...

take a guess at which loans are not being repaid and write off the ones that are the severest in arrears. They don't write off what they owe to anyone.

I'm going to lurk here to see the answers.

They had those loans on their books as assets. Now, knowing that they will never collect, they wipe away the value from their books -- and take a massive charge against earnings.

As if the money to be repaid was actually physically already there, in hand.

I believe that accounts receivable are classified as assets and not liabilities on the balance sheet.

on edit to add:

Because loans can be sold to other entities, they do carry an intrinsic and future asset value.

loans receivable are considered assets to the bank and when they "write them off" they will move them to an expense such as bad debts on the income statement and this will decrease their taxable income. so it is kinda a win - win for them.

unfortunately i am a tax accountant. unfortunately because we are heading into the worstest part of our year: the dreaded TAX SEASON!!!!

and good luck during tax season. I know you'll be busy.

The failure to require such accounting (GAAP and GAAS) would be horrendous ... frauds of all kinds.

right now, it is a receivable. Firms accrue an expected bad debt expense, usually every month. There are always bad receivables, and you have to account for them. When you write off the loans, you write it off against the allowance for bad debt. If the amount you write off exceeds the amount you allowed for, it is expensed. So they are going to have a whopping write-off because I truely doubt that they allowed enough in bad debt to cover that much of a default. The only revenue they make off of loans is interest.

you need to watch this video (entitled Money as Debt):

http://video.google.com/videoplay?docid=-9050474362583451279

and the norm is that a high percent of loans made are paid off. The problem is that at times like now a greater percent of loans than usual are falling through. Many are mortgage loans, where the house itself is collateral. The problem is that the value of many houses is less than the amount of the loan because their value has gone down rapidly. Business loans fail as well when companies fail.

How could you have a bank ("savings and loan" like in It's a Wonderful Life" - where George answers your question beautifully.)

Staring into the Abyss

The Collapse Of The Modern Day Banking System

By Mike Whitney
“In past financial crises... the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn’t working. Why not? Because the problem with the markets isn’t just a lack of liquidity — there’s also a fundamental problem of solvency.” Paul Krugman

This is truly mind-boggling.

The banks have been creating trillions of dollars of credit (by originating mortgage-backed securities, collateralized debt obligations and asset-backed commercial paper) without maintaining the proportional capital reserves to back them up. That explains why the banks were so eager to provide mortgages to millions of loan applicants who had no documentation, no income, no collateral and a bad credit history. They believed their was no risk, because they were making enormous profits without tying up any of their capital. It was, quite literally, money for nothing.


http://www.informationclearinghouse.info/article18913.htm

Happy Freaking New Year.

It becomes a loss rather than revenue.

www.moneyasdebt.net

I appreciate you and the other DU'rs fascination for it, but that video in no way addresses the question put forward in the OP.

one of the great things about the vid is the understandability of it.

I said it is not the answer to every monetary question posed on DU or anywhere else.

Yeah, I've watched it. My response is a large, satisfying yawn followed by "So What?"

"Freedom dies" because I say "so what" to a video about Fractional Reserve Banking?

So many Du'rs put that video up as some sort of answer to various financial questions that it has lost any relevance.

Of course, no one that posts a link to that video has any kind of alternative.

I suppose because we carry around "Federal Reserve Notes" instead of a depositary receipt for gold held on our behalf, the money is somehow not real.

I'll repeat what I said above; this video does not address the question in the OP, full stop.

It seems many think it is an answer to every single question, to wit:

"How does the Treasury conduct bond auctions?"
"See this video"

"How does the Bond market work?"
"See this video"

"How is it that CMO's have become so important?"
"See this video"

"Why is the value of the dollar falling?"
"See this video"

"Why is gold going up in price?"
"See this video"

"How is it possible my microwave can make ice into water?"
"See this video"

"Why is it many people can't get the fact that Fractional Reserve Banking is not the boogyman they think it is?"

Whatever you do, don't look to this video for any kind of answer.

Is too dammmit.:P

And moving it into the bonus profit column.

They DO NOT stop trying to collect on such debts.

A debt owed to a bank is an "Account Receivable". When the bank concludes that it will never get payment, it "writes off" the debt, effectively paying off the Account Receivable itself and incurring the amount of the debt (principle and interest) as an Expense for the period. The net effect for the bank is higher Expenses for the period, which will impact on Profit.

Citibank will still attempt to collect and the people still owe the money
Its a financial accounting process not a debt forgiveness process

for 10 cents on the dollar to collection agencies. Most of the time it's lawyers, especially those just out of law school. They buy a chunk of debt like $5,000, which equals to $50,000 possible pay off, some easier to collect than others. There was an interview on npr a few years ago on the subject.

zalinda

Citi had portfolioed lots of mortgage debt in the bad old days since it couldn't find sufficient buyers.
Right now there is more bad debt than there are bad debt buyers.

or that the people do not owe the money.

It means that bank has low expectations of recovering the money.
Its a non-performing asset

Some part of any business's receivables won't be collected. After some level of diligence on the part of the Accounts Receivable department, accounts are flagged .. then they're packaged and sold to Debt Collection businesses who pay some percentage for the legal title to the debt.

Reserves are regulated and businesses can get in deep doo-doo for carrying too large a reserve. (It can mask the stockholders' equity.)

is before you identify bad debt.
After specific losses are recognized, you use up the reserve

:silly:

:silly: :dunce:

:rofl:

"down the road"...in the "years ahead" and they are allowed to do this...with Banking De-Reg.

Yeah...it's CRAP...but they've always gotten lucky before...maybe they will again. :eyes: Lot's of "Desert Money" than can still prop 'em up. And, then there's the Chinese, North Koreans and if we get really desperate there's Drug Traid from Afghanistan and the Chinese who want to keep their "exports up."

The "GLOBAL ECONOMY" will RESCUE those WRITE DOWNS...never fear...the Fire Brigade is on the way!

Even the relatively small business I work for insures it's receivables. If our customers don't pay up and collection is impossible we "write it off" and submit an insurance claim if the amount is large enough to warrant such.

All this talk of having to bail out the lending industry is bullshit. The 18 Billion Citigroup is writing off will be paid by the insurance carrier instead of the borrowers. The Saudi Princes and the Bush family will still get all their Billions in tax free dividends on time.

of the loan not covered by the value of the asset if the borrrower was showing difficulties in paying. If they stopped paying, the asset was forclosed on, and entered into the books as Other REal Estate Owned for its current market value. Any different between current market value and the loan balance was charged off against income, meaning it is transferred out of the reserve (a credit transaction on the balance sheet) and charged against income (a debit on the income statement).