Regular readers know that this blog has been calling for ultra transparency and requiring the banks to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details. It is only with this data that market participants can truly assess the risk of each bank and adjust the amount and price of their exposure accordingly.
It appears that the SEC is reluctantly agreeing that ultra transparency is necessary, but is trying to experiment with different levels of opacity first to see if they can convince the market participants to accept less than the data they want and need to assess each bank's risk.
US banks should publish much more detail on their exposure to European debt, improving disclosure that has been “inconsistent in both substance and presentation”, according to new guidelines from the US Securities and Exchange Commission.
The guidance from SEC staff published on Friday comes as the largest Wall Street banks, starting with JPMorgan Chase this week, prepare to report quarterly earnings.
The guidelines tell banks they should be breaking down their exposure by individual countries and dividing it between sovereign, corporate and financial institution debt. They should also spell out the source of credit default protection and the effects of a sovereign downgrade, the SEC said.
Concern about US exposure to the eurozone debt crisis has already sparked the bankruptcy of MF Global and continues to weigh on the shares of companies such as Morgan Stanley in spite of their efforts to reassure investors that their holdings are manageable.
The SEC staff said they were “concerned about the risks to financial institutions ... from direct and indirect exposures to these holdings” and said inconsistency could lead to a lack of transparency and make it impossible for investors to compare US banks’ exposure.
To stave off shareholder worries, Jefferies, the independent investment bank, published the reference number of each European bond it held in November. Other banks have published far less.
Wells Fargo was last year warned by the SEC that its disclosures – not specifically for European debt – were inadequate....
Most institutions have ramped up their disclosure in the past year, providing exposure numbers for the most troubled eurozone countries, Portugal, Italy, Ireland, Greece and Spain.
The SEC’s guidelines suggest that it has been partly behind this move. It said it had contacted institutions warning them that their disclosures were inadequate.
But some analysts have argued that the disclosures remain insufficient. They want to know about an institution’s gross debt holdings as well as the hedges, such as credit default swaps, which banks say help them reduce their exposure to a lower net level.
There has been concern that the CDS would be ineffective in the event of a default and so the banks’ net numbers might paint too rosy a picture. In this scenario, a European bank that has written CDS on a European country might find itself the victim of collateral damage in the sovereign default and in no position to make payments to the US holder of CDS.
The SEC suggests investors should be given all the information so they can decide whether the hedges will be effective or not.The bottom-line is that analysts want the detail that can only be provided under ultra transparency and the SEC is finally beginning to move in that direction.
The latest effort from the SEC to improve banks’ disclosure comes after a push to force institutions to give more information on their risks for mortgage losses and litigation.
Fifteen months ago, the SEC wrote to chief financial officers to “remind” them of their obligations to disclose the potential cost of being forced to repurchase some of the billions of dollars of mortgages which had breached underwriting guidelines.