Thursday, August 11, 2011

How can France's banks restore confidence?

A Telegraph article asked the question of how can Soc Gen [and all of France's banks] restore confidence. Regular readers know the answer is not to ban short selling, but rather for the banks to disclose to all market participants their current asset and liability-level data.

By announcing that they are going to disclose this information, the French banks are sending a message to the market that they have nothing to hide and any problems that they have are manageable.

By actually providing the information, the French banks would be providing market participants with the ability to confirm or deny this message (trust, but verify).  Confirmation of the message would fully restore confidence.

In addition, the French banks would be setting the global standard for disclosure.
"I mean, why would I as a corporate treasurer want to take the risk?" asked one investor of analysts at Nomura on a conference call yesterday to discuss fears over the funding of European banks. 
John Peace, head of banks research at Nomura, took up the question and gave a lengthy explanation of why he thought the bank was safe, but it was his colleague Alison Miller, head of European credit strategy, who gave a more pithy response. 
"I think the answer is simple, it's about confidence. If something doesn't transpire, that could restore some confidence." 
Confidence in Société Générale, one of France's largest banks, has been lacking this week. 
The bank's shares lost more than 20pc of their value at times and at yesterday's close the lender had seen its market value reduced by about a quarter as rumours swirled the market that it could be in trouble. 
Even a statement from the bank written in bold capitals saying that rumours over its financial health were "COMPLETELY UNFOUNDED" did little to ease fears that something might not be quite right at the bank. 
What is striking is that the suspicions come despite investors having access to far more information on the exposures of European Union banks than they have had before. 
Stress test data published last month by the European Banking Authority provided the market with a detailed breakdown of the exposures of the region's 90 largest banks. 
Analysts at independent research firm CreditSights have even created their own "Stressometer" allowing clients to play around with the numbers and work out the writedowns and losses they think banks could face. 
This is exactly as predicted under the FDR Framework.  Market participants who know how to turn the disclosed data into information do so in a way that makes it easy for other market participants to benefit.
For example, take the fear of the French banking sector's exposure to French government debt, a major source of the collateral used by the banks to fund their day-to-day operations. 
Using CreditSights' database, in just two minutes you can work out that this amounted to €118.73bn (£105bn) at the end of last year. 
Break the figure down and you discover that Société Générale's net exposure to the French government is €16.1bn, about €10bn less than the larger BNP Paribas and about half that of Crédit Agricole. 
Notes sent to clients by Credit Suisse, Goldman Sachs and Nomura, all expressed themselves comfortable with the exposures of France's banks and their funding. 
The question, then, is why are the share prices of European banks being hit so hard? 
Current sector valuations show European banks trade at just 0.8 times their tangible book value and a price earnings multiple of less than six times 2012 forecast earnings. 
"I think there is a really worrying trend here," said one senior London-based credit analyst. 
"What you could be seeing is counter-parties to the French banks asking them to replace French government debt with other assets. What this means is that the market does not want any more exposure to France because of its own worries over its economic outlook." 
Since the eurozone crisis began, there has been the constant fear of contagion to the currency union's larger members and the concurrent worry that it could also lead to a new bank crisis.... 
Unlike in 2008, the banks have a lot more capital and larger liquidity reserves. Dollar funding, one of the main issues in the last crisis, is less of an issue and the banks have about $900bn (£554bn) of funds on deposit with the Federal Reserve, against $50bn in 2008. 
Their funding is also more diversified and banks have made efforts to tap every available investor base, from the Australian bond market to exchange traded funds. 
This is not to say there are not serious problems. European Central Bank lending figures for May showed that more than half of eurozone deposits were being lent out to the region's weaker banks to keep them afloat, a higher proportion than in the previous crisis. 
For all the unknowns made known by the July stress tests, investors still think their are more unknown unknowns out there. 
Actually, the investors know that there are more unknown unknowns out there.  What investors have been clearly communicating since the beginning of the credit crisis is that they do not want facts that are readily knowable included in the unknown unknown category because of a lack of disclosure.

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