Bloomberg
July 14, 2011
Better disclosure is no substitute for bad accounting. Europe’s lords of finance are going to give it a try anyway.
Tomorrow, the European Banking Authority plans to release its latest stress-test results for 91 banks in 21 countries. The good news for investors who believe in transparency is that the reports will disclose how much sovereign debt each lender held on its books at the end of last year, by country and maturity. The reports will also include detailed breakdowns of the banks’ sovereign-related derivative positions.
It’s a different story when it comes to measuring the capital cushion each bank has on hand to protect against future losses. The stress tests’ designers are letting the banks value the vast majority of their sovereign-debt holdings based on what they hope to be paid eventually, rather than those assets’ market values. That’s just like last year’s widely ridiculed tests, regardless of the growing likelihood that Greece, Ireland or Portugal will default.
By coupling the presumably inflated stress-test scores with the data dump of new disclosures, Europe’s banking regulators in essence are telling the world’s investors: “Do it yourself.” A confidential document prepared by European Union officials offers a sneak preview of what the reaction might be.
“We expect the market will conduct its own calculations very soon after publication of the results,” said the draft EU report, obtained by Bloomberg News reporter Meera Louis. “There is a general expectation that the EBA stress test results will be challenged by market tests based on the additional disclosures and addressing the perceived weaknesses in the design of the test. The risks for financial stability,” it said, “should not be underestimated.”
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