Greater disclosure of all the capital requirements faced by banks would reinforce financial stability and reassure investors no hidden dangers lurk on balance sheets, a top European Union banking regulator said yesterday.
Andrea Enria, chairman of the European Banking Authority (EBA), said the global financial crisis following the collapse of US bank Lehman Brothers in 2008 showed how opacity could destabilise markets.
He said in a speech in London that while new rules have increased transparency for investors and increased market discipline on lenders, regulators should go further and publish data about the extra capital they have asked banks to hold.
“Perfect knowledge and transparency are preconditions for competitive markets,” Enria said in a speech in London.
Under so-called Basel capital rules, banks have to hold a minimum amount of capital, known as Pillar 1. Regulators may then ask some banks to hold more capital depending on their positions and market exposure, known as Pillar 2.
Enria said requiring banks to issue bonds that can be “bailed in” or written down in a crisis means that investors need more information to price such debt.
Uncertainty over Pillar 2 decisions may be affecting market valuations of lenders
“The question is, therefore, whether supervisory decisions on, for instance, Pillar 2 requirements and actions possibly triggering the suspension of payments to stakeholders should be transparent,” Enria said.
Some regulators are leery of publishing Pillar 2 data. The traditional view among regulators is that releasing such sensitive information could generate instability and possibly lead to a bank run, he said.
“I believe that an open debate on the pros and cons of unveiling supervisory decisions is necessary and cannot be delayed,” Enria said.
Uncertainty over Pillar 2 decisions may be affecting market valuations of lenders, and contributing to confusion among investors, as seen during sharp sell offs earlier this year in banking shares, Enria said.
“If market participants are unable to compare and contrast the situation of banks vis-à-vis a specific risk, they are naturally inclined to think the worst of each and every bank,” Enria said.
The EBA is overseeing this year’s stress tests of top banks but as there will be a smaller sample than in previous tests, the watchdog may opt for annual publication of bank-by-bank data for a wider set of lenders, Enria said.
He envisaged a “central repository” of broad bank data on the watchdog’s website.
“This is what is already happening in the US, and we should aim at achieving at least the same results in the single market,” he said.