Saturday, November 17, 2012

Association of British Insurers warns that British banks becoming uninvestable

The Telegraph reports that according to the Association of British Insurers British banks are becoming "uninvestable"

due to opaque accounts, regulatory upheaval and political interference.
Please re-read the highlighted text and note that the first and most important reason that the insurers are wary of investing in the banks is because of opaque accounts.

Opaque accounts that leave banks, in the words of the Bank of England's Andrew Haldane, resembling 'black boxes'.

Institutional investors know that buying securities of black boxes is simply gambling.

Investing requires transparency so that the investor can independently assess the risk of the bank prior to making an investment decision.

The Association of British Insurers (ABI) says institutions are reluctant to invest in high street banks because of increasing risks and shrinking returns. 
The trade group is preparing to deliver a hard-hitting report to theParliamentary Commission on Banking Standards on behalf of its members who control £1.5 trillion assets and are among the bank’s biggest investors.... 
The ABI added: “The prospects of sustainable economic recovery in the UK are to some extent dependent on banks being able to raise the funds necessary to finance the growth of small and medium-sized companies. From the perspective of institutional investors, it is essential that banks should be an investable proposition.”... 
One shareholder said: “Regulators may decide that the banks need more capital, but we need to think carefully before we give it to them. Banks are increasingly risky and the returns are poor, there’s not much incentive to invest in them.”
In an early submission ahead of its report, the ABI said: “So far the public debate on banks’ capitalisation has reflected the views of regulators, politicians and policymakers… but not the providers of the capital – the investors. If more capital is required in the UK banking system, as recently suggested by the Financial Policy Committee, then investors need to understand first, why this is the case and, secondly, what is the likely return on the capital invested and associated risks.” ....
And the only way for investors to determine what is the risk and the likely return on their invested capital is if the banks are required to provide ultra transparency.

With ongoing disclosure of the banks' current global asset, liability and off-balance sheet exposure details, investors can independently assess the risk of and likely return on investing in the banks.

Without ultra transparency, investors are being asked to blindly bet on the 'black box' banks and hope that there is an acceptable return on their investment.  This is not investing, but rather gambling.

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