What Is Special with Cash Flow Statements in Banks?
Financial regulation has undergone various overhaul since the financial crash of 2008. The importance of the analytical substance of accounting information in annual reports from banks became clear. During and after the collapse of financial markets in 2008 big banks have filed for bankruptcy and others have been taken over by competitors, creditors or governments.
The historical origin of the cash flow statements has roots in big bankruptcies and that makes the lack of focus on banks’ cash flow statements interesting to study. Multiple methods are used in this paper to show special features of cash flow statements from banks and a model is developed to explain cash flow in banks, incorporating the accounting of credit creation as cash.
The paper analyses actual cash flow statements of Swedish banks over fifteen years illustrating sustained negative operative cash flow that explains credit creation in accounting terms. Simple accounting model is then used to show credit creation of banks with accounting as money. This accounting model of bank lending is extended to two banks, first netting flows from equal credit growth and then for funding of interbank lending in unequal growth of credit to customers.
Cash flow numbers have been seen as indicators of liquidity in firms – but not in banks. The model developed explains the negative operative flow of cash that existed in the Swedish banks for over a decade and why it did not signal any financial problems even though traditional textbook would tell so. Financial funding of banks has been put under regulatory focus, without mentioning the cash flow statements. Still this standard accounting framework was prepared for that purpose many decades ago. Cash flow is indicator of liquidity in firms that borrow from banks – but for the banks themselves these numbers have not been used. In the new Basel III rulebook for banks there is no mention of cash flow statements.
This brings the focus on the difference between banks and other firms with respect to financial accounting and specially cash flow statements. To analyse the cash flows in banks it is vital to identify better the difference between banks and other firms, in order to develop a specific accounting regime for banks.