Pressure on UK financial sector to detail its exposure to crisis

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The Independent Online

City analysts have called for British banks to give public statements about their precise exposure to the global credit crisis, following increasing speculation that a UK institution could be forced into Citigroup-style write-offs. The demands reflect increasing frustration that, while leading Wall Street investment banks have made painful public disclosures of their potential liabilities, the British banking industry has remained largely silent.

Analysts at Credit Suisse led the calls for better disclosure yesterday, in a briefing note warning that investors had been spooked by the banks’ silence. It warned that the complex accounting standards under which banks operate in the UK allowed too much room for manoeuvre.

“That we’ve seen no profit warnings from UK banks is not the point,” said Credit Suisse. “The market will simply assume that [the standards are] shielding the profit and loss account – the banks have at least five different ways of classifying asset backed securities, for instance.”

A spokesman for the Financial Services Authority said listed banks would be bound by the Stock Exchange listing rules in the same way as other companies. “There is a general onus on firms to make a disclosure of any price-sensitive information,” he said. However, the rules allow companies to keep such information private if they are unable to quantify the size of the problem reasonably precisely.

The difficulty of calculating the size of credit-related problems has been highlighted in the US, where several banks’ estimates of their losses have grown rapidly in recent weeks.

None of the US banks has disclosed exactly how they have worked out their write-downs. One problem is that the market for the credit instruments hit hardest by the crisis has frozen up, making it impossible for banks to mark their assets to current value. The banks have therefore been forced to base calculations of their losses on computer simulations of how the market may proceed from here. Analysts at Merrill Lynch calculate their own investment banking colleagues are assuming its sub-prime exposure is now worth only 63c in the dollar, while UBS is working on assumptions of 90c.

Simon Ward, an economist at New Star Asset Management, said that even the Bank of England did not have complete data on British banks’ exposure. “This is probably because the driving force of the Bank’s data collection until now has been its responsibilities for monetary policy, rather than financial security,” he said. Mr Ward pointed out that Bank of England figures published last week suggested that the banking sector had been forced to massively increase the financial support offered by banks to off-balance sheet vehicles and hedge funds. However, while banks made record new lending during the third quarter of £41bn to three categories – “other financial intermediaries”, “fund management activities” and “other auxiliary activities”– it was impossible to say how much of the lending related to credit issues because the Bank has no breakdown of the figures.