A charge-off is the value of a loan removed from the books when the lender determines it won't be able to recoup the money.
Charge-offs are considered losses for the company. Investors in credit card companies, for instance, don't want to see large or increasing charge-off amounts.
Write-off or write-down are related terms. Under accounting rules a business carries its assets on its books at the lower of cost or market. An outstanding loan is an asset (usually less an allowance for doubtful accounts). When or if it becomes apparent that the loaned amount cannot be collected, the business is supposed to write-down the value of the asset and in the process take a charge against current earnings. After Enron used accounting devices to keep losses off of its books, Congress enacted Sarbanes Oxley, requiring more rigorous writedowns. But in the mortgage derivatives scandal, that would have depleted the assets of many banks below minimum levels.
The write down announces the loss to the public and can affect the professional reputation of key executives. It also reduces earnings, and usually means no bonus to executives this year. Hence, write downs continue to be resisted. Getting a mortgage holder to accept a loan settlement that requires a charge-off can be a difficult negotiation. Usually it will be considered only when all other options have been rejected as less attractive or more costly.
Similarly by being unwilling to write down assets, banks show assets on their books that are not available for loans because they cannot be sold at prices carried on the books. Hence, the over valued asset is illiquid.
Related Fool Articles
Recent Mentions on Fool.com
- A Notable Shift in Bank of America?s Business Model
- A Smart Way to Think About Bank Stock Valuations
- Here's Why Bank of America Loves the Credit Card Business
- Financial Institutions Narrowly Misses on Earnings but Banks on Favorable Trends
- Why Shares of Capital One Financial Dropped 12%
- Capital One Financial Earnings: Slower Growth and Higher Expenses