Third bailout of Dexia makes case for requiring banks provide ultra transparency

As Dexia is bailed out for the third time in four years, it makes the case for why banks should be required to provide ultra transparency.  Without ongoing disclosure of a bank's current global asset, liability and off-balance sheet exposure details, market participants cannot determine how solvent or, in Dexia's case, insolvent a bank is.

As reported by the Guardian,

France and Belgium agreed to pump €5.5bn (£4.3bn) into Dexia, the stricken lender the two states were forced to bail out a year ago, after it made another large loss and extensive writedowns. 

The prospect of injecting more money into Dexia, which had already absorbed €6.4bn in funds in 2008, threatens to undermine both countries' efforts to rein in their deficits at a time of intense scrutiny on eurozone budgets.

If Dexia and the other banks were required to provide ultra transparency, it would end any reason for governments to use their limited resources to bailout the banks.

Market participants could use the information to independently assess the risk of Dexia and adjust their exposures to what they can afford to lose given this risk.  As a result, the issue of contagion is eliminated.

Belgium will inject €2.92bn, or 53% of the total, with France providing the remaining €2.59bn, the Belgian and French ministries said in statements. 

The two states would receive in return preference shares with voting rights, so any financial gains Dexia makes would then flow back to them.

There is no need for the governments to inject capital because banks can operate with low or negative book capital levels.

Banks can do this because of deposit guarantees and access to central bank funding.

The deposit guarantees make the taxpayers the banks' silent equity partner when they have low or negative book capital levels.  There is no legitimate reason to transform this relationship from a silent partner to a fully funded partner as the market knows the governments are on the hook for any losses the depositors and any other government guaranteed debt the bank may have issued.

The move was announced shortly before Dexia released third-quarter earnings showing it had made a net loss of €1.23bn, bringing the loss for the first nine months to €2.39bn. It lost €11.6bn in 2011. 

Most of the negatives have been in the form of impairments and writedowns related to the sale of assets. 

The group, rescued for a second time in three years last October, also had to pay fees of €725m to the states for the guarantees, which cover Dexia's borrowings, in the first nine months of 2012.....

Dexia said that as from the end of September it had a negative net asset position, mostly resulting from a writedown on the value of its holding in French arm Dexia Credit Locale, prompting its need for fresh funds to stay in business.

Just how negative is the net asset position?  Finding out requires Dexia to provide ultra transparency.