Buy-side confirms that disclosure is solution to alleviate solvency fears

In a Bloomberg article, the buy-side confirmed that disclosure of current asset and liability-level data is the solution to alleviate their solvency fears.

“There is a great cloud of uncertainty that’s hanging over the U.S. banks about the full extent of the exposures they have to French and other European banks,” said Andrew Karolyi, a finance professor at Cornell University in Ithaca, New York. “The market is clearly not reacting well to what they’re seeing.” 

Citigroup and Goldman Sachs, both based in New York, were the only large U.S. banks to quantify their exposures to French banks in their quarterly filings, known as 10-Q reports. Cross- border outstandings include cash deposits, receivables, loans and securities. They also include short-term collateralized loans of securities or cash known as repurchase agreements or reverse repurchase agreements. 

The disclosures, which didn’t identify the French companies involved in the two banks’ dealings, don’t provide a full picture of the risks because investors can’t see any offsetting collateral or hedges, said David Hilder, an analyst at Susquehanna Financial Group in New York. 

“Unfortunately, I think the numbers in the 10-Qs are really not economically meaningful,” said Hilder, who has a “positive” recommendation on Goldman Sachs and “neutral” on Citigroup. “The gross amount is very likely to be misleading in terms of true economic exposure.” ...

The 2008 financial crisis showed how the interconnections between financial institutions worldwide can cause risks in one company to spread around the globe. Three years later, investors remain unaware of U.S. banks’ Europe-linked risks, Karolyi said. 

“As investors in these banks, we crave greater clarity about the full extent to which they’re laying off their exposures and how and in what form,” Karolyi said. “A little bit more transparency would go a long way to alleviating a lot of investors’ concerns about the extent of these exposures.” 

...“The French are particularly exposed to funding concerns because of their funding structure,” the RBS analysts wrote. “It is quite likely in our view that funding will not become a serious issue for the large French banks, that anxieties subside and that the shares rebound. But there is a non-trivial risk that confidence deteriorates further.”