ABSTRACT
The dissection of the pro forma statement of prospective cash receipts and commitments for the proposed investment project is the focal point of the process that determines the acceptable margins of safety for both the borrower and the lender. And the idea of financial fragility is built around changes in these margins of safety. A firm for which the margin of safety is positive for any probable increase in interest rates may be classified as having fully hedged its future cash commitments. The more things change, the more things appear to remain the same as far as margins of safety are concerned. The combination of the margin of safety and the weight of the argument remains stable over the expansion, and the banker does not perceive any increase in credit risk exposure. The problem is that the weight of the argument cannot be used to meet the loss of income from loans placed on an accrual basis.
