The SEC released a guidance report advising banks to detail more specific European debt exposures in their quarterly filings last week—just one week before large financial institutions are due to report earnings, beginning with JP Morgan this Friday.
The Wall Street Journal breaks down the new information the SEC wants, but added that these are non-binding “guidances,” meaning they are not technically required.
The SEC guidance asks banks to consider providing a breakdown of their exposures in each country, divided by their gross sovereign, financial-institution and non financial-corporate debt exposures.
Regulators also are seeking information on how gross exposures are hedged through instruments such as credit-default swaps, as well as a discussion of “the circumstances under which losses may not be covered by purchased credit protection.”
The measure comes amid continued worries about the stability of the Eurozone, as the past three months have been haunted with the area’s effect on US financial institutions with the bankruptcy of MF Global—whose stock plummeted after investors lost confidence in the company following the release of its $6.3 billion in European sovereign exposure—and the spotlight shone on investment bank Jefferies.
The five big American banks detailed their net exposure to European sovereign debt to varying degrees in their Q3 filings three months ago. Morgan Stanley, whose stock got throttled over the summer due to fears over its exposure to French banks, released a more detailed report specifying hedges and CDS adjustments. But others, like Goldman Sachs and JP Morgan, outlined their net PIIGS exposure more simply. The SEC has called the measures “inconsistent.”
The new SEC guidance could prove to be a double-edged sword. Although it allows more transparency to investors, it could also fuel premature investor fears. Consider the effect on MF Global—though the brokerage was plagued by problems other than its Eurozone holdings and ultimately fell due to margin calls on repurchase agreements—the initial detailing of its $6.3 billion in European sovereign debt caused shareholders to flee the stock, but now those bets on Europe are paying off for investors that picked up MF Global’s sovereign bonds in a fire sale.
Some banks seem ready to see the Eurozone crisis through no matter what. Just yesterday, JP Morgan CEO Jamie Dimon said in an interview with CNBC that he does not intend for his bank to flee European debt, because “we’ve been doing business with Spain and Italy for 100 years, and we want to be there in 100 years.” Ironically, JP Morgan is the American bank with the largest exposure to the Eurozone, with over $15 billion in net exposure as of Sept. 30, 2011.