There is a golden rule in the stock market: avoid commenting on market speculation. Barclays and Royal Bank of Scotland should break it. The time has come for them to respond fully to market fears over their exposure to US subprime mortgages.
Shares in the two UK lenders have fallen rapidly in recent weeks and investors’ worries are entirely understandable. RBS and Barclays have big exposures to the US among British banks, as well as the largest capital markets businesses.
A falling share price should not normally trigger a responsibility to comment. Regulations require a company to issue a statement on a downward movement in its shares only if inside information seems to have leaked. That does not appear to be the case here. Moreover, if companies comment on market speculation once, they may then have to respond to every rumour about takeover talks and trading losses.
These factors justify reticence in a normal market. The difference today is that we are not in a normal market. Citi, the world’s largest bank, this weekend disclosed a possible $11bn (£5.3bn) shortfall relating to subprime mortgages, barely two weeks after its third-quarter results. And Merrill Lynch last month increased its subprime writedowns from $4.5bn to $7.9bn.
Investors are clamouring for some hard numbers and in the circumstances they deserve some. Barclays and RBS ought to be able to bring forward trading updates slated for the end of the month and early December. All banks should have a clear picture of their financial performance to the end of October long before then. A snapshot of exposure to collateralised debt obligations, subprime asset-backed securities and leveraged loans would be useful. These could be valued as the banks judge appropriate, so long as the methodology was transparent.
Investors should give something in return. They should recognise that when this crisis passes, the golden rule will return and companies will not let their falling share prices bounce them into making announcements again.