Financial Crisis Insights on Bank Performance Reporting (Part 1)

A feature of the financial crisis that begs for review is the sustained depressed price-to-book ratios (P/Bs) of many leading euro area and US banks. This study assessed P/B trends alongside the factors that we expected to influence this key valuation metric. We analyzed a global sample of 51 banks—mostly large, complex banking groups—over an 11-year span covering the periods before, during, and after the crisis. We found evidence of relationships between P/Bs and loan impairments, profitability, and risk. Our results show that the representation of loan impairments on balance sheet (allowance for loan losses) lags markets’ economic write-down of these loans. This finding signals the delayed recognition of loan impairments by the analyzed banks and justifies the efforts of accounting standard setters to ensure a more complete and timely recognition of financial asset impairments. It also highlights the importance of the ongoing asset quality review and emphasis on balance-sheet repair by the European Central Bank and national regulators.

Read part two of the Financial Crisis Insights on Bank Performance Reporting publication, “Relationship between Disclosed Loan Fair Values, Impairments, and the Risk Profile of Banks.”