This report builds on the findings in Part 1 of this two-part publication regarding the effect of loan impairments, profitability, and risk on price-to-book ratios (P/Bs). We provide a granular analysis of the year-to-year trends in asset quality and carrying values of loans before and during the financial crisis. We also compare loan impairments trends versus credit default swap spreads for banks in different countries in order to get a broad indication of whether the credit risk signals from financial statement information are consistent with those from capital-market-based information. Our analysis includes data from many of the largest global banks in the European Union, the United States, Japan, Canada, and Australia. Our findings show the likelihood of significant cross-country variation in the quantification of disclosed loan fair values and impairments. These findings point to the need for robust disclosures to help investors better understand the sources of differences among banks. They also show the need for ongoing scrutiny by securities regulators to ensure that investors are getting high-quality and comparable information.
Read part one of the Financial Crisis Insights on Bank Performance Reporting publication, “Assessing the Key Factors Influencing Price-to-Book Ratios.”