Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Wednesday, June 25, 2008

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.


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