It is extremely difficult for a nonfinancial person to understand the true financial condition of their bank, but we will try to provide some basic analysis of the potential problems and areas where they may wish to discuss further with others.

For any company, bank or non-bank, the issue is well worth investigating if the auditor has recently changed.If auditors raise the issue of “internal controls”, it will be a serious one for Banks.

The financial statements of a bank read significantly differently from those of a typical manufacturing or service company.The four key areas related to bank financial statements are:

What the Banks do;Record their investments;Provisions for loan losses;A policy of accrual accounting

When a business person or financial analyst studies the financial statements of an ordinary company, there are some very traditional ways to study the financial statements — leverage, liquidity, profitability.Unfortunately, this is a challenge, and these technologies don’t apply to Banks’ financials.

Such techniques do not work because it is extremely difficult to understand the quality of a bank’s assets, and many methods provide material that makes it difficult even to infer fundamentals.Timing is everything, they say, because bank assets actually change all the time, making it difficult to grasp values and portfolios.

One of the best ways to analyze a bank’s financial health is to create a format that allows tracking of specific data elements.Spreadsheets are a good tool for this approach.

We also want to look at overall liquidity, which is why our spreadsheet is so convenient that we can track current assets at any time.For Banks, the most liquid assets are cash on hand, other accounts payable to Banks and government bonds.

The next major asset class is riskier assets – loans to customers and other Banks, of course.

Anyway, there are a lot of different parties interested in Banks and financial stocks today, even our government.Ordinary people may have to rely on their financial advisers and others to understand what is really going on at the bank, but we want to show that even some basic analysis allows ordinary people to understand what is going on at the bank.Worries about Banks’ finances are growing and, in fact, are at the very end of a new wave of market fears — so we should all be interested in how they perform.When we are caught off guard, history has proved too late.

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