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Victor Jimenez Headshot

Europe's Banks Beyond The Pale

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"Again?," you might sigh.

For all their self-alleged sophisticated protestation, European banking entities have somehow ended roughly mirroring the very political disarray their CEOs blame for the slow deleverage levels in the industry and timid lending activity. That is, for their stubborn negative to accept that yesterday's boom succulent profits are today's poisonous hot air.

European governments generate uncertainty, critic voices within the finance sector have been responding to businesses whenever they seek credit. Populist politics mess with us at their own peril, banks retort to 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.

A Capital Requirements Directive had already introduced certain customary disclosures of market and credit risks, mainly over the banks' internal ratings and securitisation. Some faults, even unintended omissions, were meant to appear in banks' reports because this directive was recently enhanced. But the EBA says "weaknesses already identified in its previous assessments remain and call for further action."

Don't be put off by the jargon. The thing is that banks don't listen. But you should.

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 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 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.

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. And I am talking about everybody's banks, not just PIIGY Bankias. Lloyds and RBS paid this week the lowest prices since January 2011 in exchange of market credit, for instance, unlike most of their counter-parties in the continent. For some, the euro crisis is conveniently currency-localised turbulence. However, bank equity investors should feel suspicious of EU entities outside the euro zone, too. JP Morgan has issued a note on British banks revealing exposures to increasing dependence on external support for funding costs, focus on net profits, and regulatory pressures for debt sale when unanticipated charges reduce absolute capital.

Lloyds and RBS would be first in line to face the blow, analysts said.

"We believe that the market is yet to fully incorporate the implications of the recent shift in the UK regulatory approach," the Europe equity research department suggested. One such change could have made the British banking industry more inscrutable instead of more open to investor surveillance.

The UK financial supervisors put now more emphasis in absolute capital generation than in the compliance with Basel 3′s 10 percent core tier 1 ratio. That frees the entities' liquidity buffer and lets them open their lending activity again. Credit availability for mortgages as improved, JP Morgan pointed out. Yet "it makes more difficult for the market to track the progress on capital, as the benchmark is not publicly available and varies bank by bank."

In fact, since 2009, RBS' absolute capital has shrunk by -3 billion pound and by -2.3 billion pound in Lloyds' case, in spite of core profits before tax being 17 billion pound and 15.7 billion pound, respectively.

Oh, I know what you're thinking by now: not German banks, they couldn't possibly... Oh well. Tough.