Accounts at EU banks are 'a joke', warn analysts
Poor disclosure means depositors cannot tell if a bank is solvent, says credit ratings expert
James Moore is the Independent's Associate Business Editor and writes the Outlook City comment column from Tuesday to Friday. He also has a keen interest in disability issues and when not attempting to further injure himself playing wheelchair basketball.
Monday 01 April 2013
European bank accounting has been branded "a joke" by a former vice-chairman of the credit ratings agency Moody's in the wake of the bailout of Cyprus and its controversial levy on wealthy depositors.
Writing at Project Syndicate, a website that disseminates commentaries by experts, economists and political thinkers, Christopher Mahoney argues that Europe's "Cyprus Doctrine" has put the onus on depositers to do their homework and ensure they put money only with creditworthy banks. But he says this is all but impossible for them to do because of the way banks report their finances.
In the article he says: "There is only one problem with European 'depositor discipline': European bank accounting and disclosure is a joke. There is little relationship between a European bank's creditworthiness and its financial reporting.
"Both dead Cyprus banks were solvent according to their latest financials, and both passed the European Banking Authority's 2011 stress test."
He argues that credit rating agencies such as Moody's cannot be relied upon by depositors because they only have access to the same financial information put out by banks available to everyone else, information which he describes as "bogus".
Mr Mahoney points out that "not one" of the banks bailed out across Europe in recent years admitted that they were insolvent or had holes in their loan books in their financial reporting until they went cap-in-hand to taxpayers in their respective countries. He adds that during his time market rumour and anecdote were often a better source of information.
He warns that leaving depositors to swing in the wind could have grave implications for Europe's economy, as concerns grow over contagion spreading to the already troubled Spanish banking sector.
Mr Mahoney, an analyst for 35 years, says: "I remember the lessons of those 35 years, the most important of which is that bank deposits make up most of the money supply and, as such, are contingent liabilities of the central bank. If you screw around with bank deposits, you are screwing around with the money supply which drives nominal growth. You can't introduce depositor discipline while expecting economic growth. It's one or the other."
Cypriot banks have reopened following a two-week shutdown after an EU bailout, although limits on withdrawals remain in place. The country lost €1bn in deposits in February, and there are fears that its status as an offshore financial centre could be irreparably damaged by a deposit levyon holdings of over €100,000.
The Cypriot crisis caused markets across the world to shudder, and re-focused attention on the eurozone debt crisis.
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