Wednesday, October 26, 2011

Expect European banks to voluntarily adopt detailed disclosure of assets and liabilities

As we approach the finish line for the EU's resolution of its sovereign debt and bank solvency crisis, it is becoming clearer that Eurozone banks are going to opt for providing 'utter transparency.'

As this blog has said on several occasions, utter transparency is disclosure of the bank's current asset and liability details.

Why are banks going to voluntarily adopt detailed disclosure of their current assets and liabilities?

First, because no investor is going to put money into a Eurozone bank without being able to assess the risk of the bank and knowing if it is currently solvent or not.  This was definitively shown in Spain, where the cajas did not disclose this information and most of them ended up being nationalized because they could not tap the capital markets for new equity.

Second, because the Eurozone bank managers want to raise equity from the capital markets and avoid the numerous restrictions that will be placed on them if they cannot do so and instead have to turn to their host government or the European Financial Stability Fund for capital.  These restrictions cover bonus payments and dividends.

As the Telegraph live reports,
Banks should first use private sources of capital, including through restructuring and conversion of debt to equity instruments. 
Banks should be subject to constraints regarding the distribution of dividends and bonus payments until the target has been attained. 
If necessary, national governments should provide support, and if this support is not available, recapitalisation should be funded via a loan from the EFSF in the case of Eurozone countries.

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