Thursday, July 21, 2011

More on the European stress tests and its related data disclosure

The blog Bond Vigilantes ran an interesting post on the European stress tests and its related data disclosure.

This post puts an emphasis on what is required to ensure that market participants have access to all the useful, relevant information in an appropriate, timely manner.
So the results of the bank stress tests are out. Do they add anything from an investor viewpoint? 
Well, despite the best efforts of the European banking Authority, we didn’t get the harmonised EU data we were hoping for. To say that there are inconsistencies in the data would be an understatement. 
Disclosure varies hugely bank by bank, especially in areas such as their Loan to Value ratios for real estate lending, and that’s before you start trying to factor in the differences in the way property valuations are performed or indexed in each country. Banks, and in particular the tax systems and legal systems in which they operate, are still national. We’re a long way from a harmonised, EU wide banking sector. 
There’s also no real information on banks’ liquidity positions. Assumed funding cost increases over the next two years are simply driven by the interest rate assumptions used, with little or no linkage to the banks’ actual and increasing costs of funding. It’s impossible to analyse what is happening to individual banks’ funding sources and costs. The EBA admits liquidity and funding is a critical issue but has backed away from making public its liquidity stress testing, presumably because they are concerned this might provoke further concerns. 
One of the most frustrating issues for investors is that the EBA doesn’t stress test the legal entities to which investors and market counterparties are exposed or potentially exposed. So the French mutual groups are tested on a consolidated basis, when in fact debt and equity investors are taking exposure to very specific legal entities within the group, such as CASA within the Credit Agricole group, whose risk profile will be very different to that of the consolidated group. 

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