Calls for wider and more detailed transparency by banks are becoming ever more strident.

For anybody writing on disclosure and the credit crunch, the temptation to redraft the regulations surrounding banks’ disclosure is overwhelming. And with good reason: the absence of transparency that has become evident in recent months has been quite shocking. Manufacturing companies would not have been allowed to escape censure.

So what is the problem? Part of it IS about regulation; the irony is that banks operate globally, and yet regulation for the most part operates nationally. Part is also the long trailed role of the rating agencies, and much time has been given to the potential changes in their regulation. And part is also in the way in which banks seem to have lost (abandoned?) their traditional underwriting skills.

However, for me, the challenge is more in the way in which banks approach transparency. As any IR professional knows, the first task is to identify potential risk in the business, and highlight it. Banks carry vast amounts of liquid assets on their balance sheets, Through this highly leveraged process, banks’ (highly profitable) prop desks look more and more like hedge funds, carrying an entirely different risk profile than their more traditional interest differential business model.

As always, I will argue that good disclosure practices are part of the solution. Many banks do not disclose information on divisional level return on equity. Capital adequacy levels in some banks are less than optimal. Just a couple of the risks that banks should be disclosing. More broadly, few are telling the story of the company - the investment proposition - as they should.

Doing so would allow the market to attach the valuation premium that in many cases recent trading statements would suggest should be expected.

Short selling disclosures - not enough to cure abuse

I certainly didn’t expect such a fast reaction! The Transparency Matters post on May 7th considered the ways in which short selling disclosures were evolving around the world, and highlighted actions in the US, in Australia and Hong Kong. And we highlighted a little reported comments from the FSA Chairman noting these disclosures were a “reasonable proposition”.

The new rules published by the FSA on Friday limit short selling disclosures to stocks undergoing a rights issue. Clearly the FSA has in mind the potential for market abuse. An investor borrowing stock to short and close out later on at a lower price, could, in theory spread rumours to drive the price down.

However, the FSA should intensify still further its work on identifying potential market abuse – whether through short selling or not, and whether in connection with a rights issue or not. (Anyway, are we going to see a reduction in rights issues and more funds coming in from sovereign wealth funds to support banks’ balance sheets, as we have at Barclays this week?).

The UK Chancellor has said that this intervention is temporary, and that regulators will look for a permanent solution.

This will not be easy. The best the FSA could do in its earlier consultation in 2002 was to arrange for CREST to publish stock lending data as a proxy for short selling levels. Since a (prime?) reason to borrow UK stock is for dividend washing (to take advantage of lower tax regimes in other countries), the coherence between stock lending and short selling is at best limited.

The only country that (as far I know) has a working regime is Hong Kong.

It will also be interesting to see how alternative investors manage the mechanics of these disclosures, that will have to be made through a regulatory information service. With a deadline of this Friday, regulators have not given investors a great deal of time to get this organised.

As promised - thoughts on achieving a full valuation

A few weeks ago, I trailed the publication of a white paper on how to help analysts attach the full premium to a company’s financial valuation. The paper was published this week in conjunction with the National Investor Relations Institute’s (NIRI) annual conference in San Diego.

The white paper calls for companies to provide greater transparency on assets that are not mandated by disclosure regulations but which contribute to the overall value of a company.

According to the authors – the Disclosure Advisory Board - the investment community has become increasingly focused on near-term financial metrics as the primary means for evaluating a company. Non-financial value drivers, such as presenting a clear corporate strategy and creating explicit links between research and development spend and new revenues, are difficult to monetise on a balance sheet. They also require investors to take a longer-term outlook.

Among the challenges faced by investor relations professionals in communicating adequately to the markets are getting internal access to sufficient data in the first place, to management concerns about disclosing detailed and forward looking information, to inadequate consistency of reporting.

Unfortunately, the mandated disclosures from most companies do not allow analysts to apply fully a premium to their growth potential. And companies whose stock market valuations do not accurately capture their non financial value drivers need to widen their communications.

And - as the paper argues – no one is better placed to create and communicate these links than a professional IRO.