Monday, November 14, 2011

Banks disclose more info as concerns mount about Euro crisis

A Wall Street Journal article adds further confirmation to this blog's thesis that disclosure is the key to restoring investor confidence.  For banks, this disclosure is utter transparency into their current asset, liability and off-balance sheet exposure detail.

The article discusses how banks have begun to disclose more than legally required about their exposures to European sovereign debt.

However, this disclosure has been woefully unsatisfactory for investors.
Mounting concerns over the euro-zone crisis are prompting some of the world's largest banks, including U.S. banks, to release more information about their exposure. 
Even so, the flow of new data has so far failed to put worries to rest, partly because of investor doubts about how well banks' hedging strategies might work in the event of a euro-zone financial shock....
The banks' potential losses in these countries generally fall far below the threshold at which the banks must legally disclose them. For much of the past year, many had resisted calls from investors for more information on the losses they could face, saying they were well hedged and the exposures weren't material. 
Yet at a time of intensely negative sentiment, even the new information hasn't relieved market pressure.... 
The market's worries have been deepened by the weakening of a widely used defense against financial contagion: credit-default swaps, bilateral agreements that are supposed to insulate against losses from debt defaults. Recent efforts to quell the euro crisis have raised questions about the viability of that popular insurance-like hedging vehicle. 
This latest chink in the financial armor has investors demanding more evidence that financial companies aren't making outsize bets in weaker European economies and aren't relying too heavily on hedges that might falter in a pinch. 
"We're in an era of intense market skepticism regarding financial institutions' balance sheets," said Herb Lurie, a senior managing director at Guggenheim Partners, an investment firm with over $125 billion in assets. "If you want optimal credibility with investors, you need to provide maximum disclosure."

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