Banks' Unrealised Capital Gains Lost as Equity Prices Tumble
The slump in equity prices has quickly wiped out unrealised capital gains in European banks’ permanent equity portfolios, according to a report by Standard & Poor’s. The ratings agency noted that the increasingly challenging economic environment throughout much of Europe has required provisioning that has substantially depressed the reported performance of these portfolios. The agency added that the inherent risks that permanent equity portfolios introduce into European banks’ credit-risk profiles goes beyond exposure to volatility in market valuations. ‘These stakes, which are usually characterized by a degree of permanence linked to a strategic or business-development objective, do not carry the benefits of diversification, as their returns are often affected by similar economic factors to those influencing the performance of banking business,’ said credit analyst Angela Cruz. ‘In addition, they may also lead to a higher concentration of exposure to specific entities, industries, and/or countries.’ The report found that from an economic perspective, permanent equity stake portfolios inherently bear a different, higher risk than banking business and should, therefore, be backed by a bigger capital cushion.