Simply, without this information, even banks cannot tell which of their peers are currently solvent or insolvent and which can repay a loan and which cannot.
If banks don't trust each other, why should an investor?
That was a troubling question for U.S. banks back in 2007 and 2008 as the financial crisis got under way and banks reduced exposures to one another. And it is again pertinent as Europe founders.Please re-read the highlighted text as this is why ultra transparency is needed.
Fourth-quarter 2011 global-banking data from the Bank for International Settlements showed that interbank lending fell $637 billion in the fourth quarter of 2011. Of this, nearly 60% was due to a falloff in cross-border claims on banks in the euro zone.
"It was the largest contraction in cross-border claims on euro-area banks, in both absolute and relative terms, since the fourth quarter of 2008," the BIS noted.
What's more, the reduction wasn't just related to troubled European countries like Greece and Portugal or even Spain and Italy. Cross-border claims on banks in Germany fell 8.7% and in France by 4.2%.....
While a natural form of self-protection, such moves also are implicit votes of no-confidence in counterparties.
That serves as a reminder for investors to continue doubting claims by European banks that they have sufficient capital.
With many of Europe's biggest banks trading at less than half their book value—Germany's Deutsche Bank, for example, is about 45%, France's BNP Paribas is at 43% and Italy's UniCredit is at 25%, according to FactSet Research—investors have decided that bank assets are likely overstated or their liabilities understated.
The BIS figures show that banks themselves may be of a similar mind.
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