Europe’s banking entities seem to somehow mirror the political disarray their CEOs often blame for the slow deleverage of the industry and timid lending activity.
European governments generate excessive uncertainty, critic voices within the sector have been responding to businesses that seek credit and regulators who demand simpler balance sheets. Yet, investors and clients will be left no less confused after reading the latest follow-up review published by the European Banking Authority (EBA) on transparency.
The Capital Requirements Directive introduced certain customary disclosures of market and credit risks, mainly over the banks’ internal ratings based framework and securitisation. Some faults, even unintended omissions, were meant to appear in banks’ reports because the directive was recently enhanced. But the EBA says “weaknesses already identified in its previous assessments remain and call for further action.”
The intelligence provided by the industry regarding the impact of higher core capital rates and reserves on funds, for instance, is “of varying quality.” Timing, formats and verification of necessary disclosures have experienced little improvement, and the EBA openly concludes that investors are sitting in the dark about data to which they should have access.
The sample was made out of 19 entities, and “half of the banks simply failed to comply with the relevant requirements, while many of the banks gave confusing information about assumptions underlying internally developed models” to compare, for instance, expected losses against actual losses.
Worryingly enough, market risk has been highlighted as one area where “significant improvements are needed.” The dossier makes for a sad lesson on why the euro zone crisis feels like a never-ending story. Whatever official watchdogs are doing, it isn’t working, but banks cannot keep up the same game if they want investor confidence back.