Sunday, March 31, 2013

Ernst & Young predicts that banks will have to be more transparent

As reported by the Telegraph's Harry Wilson, based on a survey of corporate executives, Ernst & Young is predicting that banks will have to be more transparent about their risks.

The EU's using deposits to recapitalize the Cyprus banks has reinforced the need corporate executives see for transparency.  It has reinforced the need for transparency as corporate executives don't want to put their working capital at risk by keeping it in a bank that is likely to need to be bailed out using deposits.

Regular readers know that the only way corporate executives and other market participants can have access to the information they really need to evaluate the risk of a bank is if the bank provides ultra transparency.  It is only by disclosing its current global asset, liability and off-balance sheet exposure details that a bank's risk can truly be assessed.
More than half of top executives at some of the world’s largest companies think their banks are still taking too many risks five years on from the financial crisis, according to a survey by Ernst & Young. 
Just 43pc of executives said they were completely confident their banks were taking acceptable risks, while less than a third said their banks shared adequate information on its risk, capital and liquidity.
Among the businesses taking part in the survey were the drinks maker, Diageo, Google, the internet search provider, and the energy company, Total, with executives complaining about a lack of transparency from their banks. [bold added]
Please re-read the bolded text as it nicely summarizes how the lack of transparency prevents banks from being subject to market discipline.  Top executives think, but don't know, that their banks are taking too much risk.  The executives would like to know so they could manage their exposure based on the actual level of risk at each bank.

Banks become subject to market discipline when the risk the banks take is reflected in the amount and cost of their funding.  Clearly, corporate executives would like to exert market discipline on the banks, but are prevented by a lack of transparency.
“The lingering after-effects of the 2008 financial crisis and the ongoing challenges in the eurozone have forced corporations to focus on the stability of their core banking teams. 
Counterparty risk and exposure from banks have become heightened concerns for large corporates and, as a result, we predict that banks will have to be more transparent about their risk profiles and portfolio concentration,” said Steven Lewis, a global banking analyst at Ernst & Young....
It is nice to have Ernst & Young confirming the need for banks to provide more transparency.

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