“You have nothing to fear if you have nothing to hide” — the words with which Voldemort’s followers took over the Ministry of Magic, and the bane of civil libertarians for generations. But it should have more application to banks than to characters in Harry Potter.
If transparency and disclosure is useful to the market — as the swathes of analyst comments suggest and price movements endorse — why should it be only down to the EBA to get it out there? We’ve been having sovereign crises, on and off, for well over a year now (slightly more than twice the lifespan of the EBA).
Surely, at some point in the last year, the peripheral exposures of European banks might have been interesting to debt and equity investors alike? And this doesn’t mean “special edition” sections in quarterly slide presentations, breaking risk down into “Western Europe” or “EMEA”, or separating out Greek subsidiaries to report separately (step forward, Crédit Agricole....).
What it means is doing what the EBA asked, but doing it all the time. Heck, do it harder. If the EBA stress tests aren’t tough enough because they don’t include a sovereign default, then investor relations and treasuries should run their own. Model sovereign defaults, explain how it would affect RWAs, and explain how you modelled it.
Include any exposures that investors might be interested in. Create stressed scenarios that address market hot button topics.
Investors will appreciate it, and if the news is good, they will reward it with tighter spreads. Investors that don’t bother looking will risk losing ground to their competitors.
At this point, one could be jabbing the screen and saying that investors do not reward this behaviour (or at least, they haven’t so far). The FIG market has lurched from open to closed and back again in the past year, without much in between. Borrowers do not want to launch deals when better conditions could be around the corner. Doing so looks desperate, and costs more.
But this is no way to run a market. Even if the Greece situation gets resolved somehow, the FIG market is going to have to learn to cope with sovereign jitters. There will be other worries and other risk-off periods over the next year. Squeezing all issuance into narrow windows of risk appetite will be unrealistic — far better to decouple, by explaining in as much detail as possible the effects of the market’s worst fears. The unknown is much, much scarier than the known.
As this week’s market eloquently demonstrates, a bit of stress test data is not going to restore confidence ahead of full-blown eurozone disaster. But voluntarily publishing credible stress test data might help to keep the FIG market open and functioning for longer, even when the eurozone’s politicians are busy twiddling their thumbs.