parti: objectives and features of the new reporting system 159 - TARA

3 5 The Need for Provisions'Data to Reflect 'True' Provisions Only: The adoption of
the net basis for the measurement of credit meant, however, that provisions had to
reflect accurately only the diminution m the value of a bank's assets that had already
taken place To the extent that any portion of amounts recorded as provisions was
really of the nature of a reserve, the proposed treatment of provisions would not lead
to an accurate measurement of credit Provisions would be overstated to the extent
that they represented amounts set aside to cover future losses, 1 e , losses which may
arise, in respect of loans outstanding at the balance-sheet date, from events
occurring thereafter and losses on loans extended after the balance-sheet date.
Although it could be considered prudent to provide for such future losses, the
proper way to do so is through contingency reserves, disclosed m the balance sheet
as part of shareholders' funds
4 Offsets
A bank, in compiling its balance sheet, may, in respect of certain related accounts,
set off a debit balance against a credit balance In compiling monthly bank returns,
such practices have implications for monetary aggregates and for liquidity and
pi udential ratio requirements In view of this, it was necessary for the Central Bank
to lay down strict conditions which had to be satisfied before offsetting could take
place in the new monthly bank return
4 1 Offsetting Current Accounts and Overdrafts The practice of offsetting between
current accounts and overdrafts could take place where a legal right of setoff for
principal exists This practice arises where a customer holds two (or more) accounts,
say, a Number 1 account with a debit balance and a Number 2 account with a credit
balance i \ These accounts are normally leferred to as "same name and same title"
and may also set off interest u Such accounts could prise in a large number of
circumstances, in particular in the case of companies and self-employed individuals.
For example, a company may have a separate wages account, a shop-keeper may
have separate accounts for, say, two or more shops, or a dentist may hold a separate
account for social security receipts and payments Reasons for holding separate
accounts would be administrative convenience or ease of reconciliation on the part
of the customer
4 2 Offsetting Deposit Accounts and Overdrafts or Term Loans: Offsetting between
deposit accounts and overdrafts or term loans could arise between small savings
accounts and loans, or where a customer provided the bank with a "letter of hen"
which would allow the bank to offset an overdraft or term loan against the deposit
account 15 Such arrangements could arise where a customer was reluctant to
break a large deposit when a need for short-term funding arose, or where a company,
wishing tafacihtate an employee, places a sum on deposit with a bank on the basis of,
which the bank would then make a loan to the employee In such cases maturities on
debit balances eligible for offset must, by definition, always coincide with maturity
dates of customers' liabilities In the case of term deposits, the term of the loan and
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