If Europe's bankers were hoping to put a positive spin on financial markets as they prepare to report first-quarter earnings, it might be time for them to throw away those prepared statements.
Oil tumbled the most in two months on Monday after output talks between the world's biggest producers failed to produce a deal to curb production. It's worth remembering that hopes for some kind of agreement helped oil to rebound from a low of $26 in February to more than $42 last week.
That recovery is now under threat -- and with it any hope European banks had of batting away investor concerns over their exposure to the energy industry. The patchy disclosures provided by the region's biggest lenders suggest that exposure totaled $200 billion last quarter. That's more than U.S. banks' estimated $123 billion .
It will also make a quick return to broader normality less likely on financial markets after a tough first quarter, with hedge funds probably nursing losses and more volatility ahead.
European banks need to follow their U.S. counterparts and provide more transparency on their loans to the industry.
U.S. banks booked more than $1 billion of additional provisions for energy-related losses in the first quarter. Some firms were more aggressive than expected: JPMorgan's $529 million in extra provisions were more than the $500 million the lender had previously forecast.
Of course, banks are perfectly entitled to dangle the carrot that losses won't turn out as bad if bearish fears of oil sliding to $20 to $25 per barrel fail to materialize.
Citigroup tempered its prediction of a full-year credit loss of $1.4 billion, saying the estimate was based on oil trading at $30 a barrel. That bill would be "somewhat less" if oil holds above $40, Citigroup CFO John Gerspach told investors. (He didn't say by how much.)
But with oil now at $39 per barrel, it makes little sense to make a show of defiant optimism. The credibility gap would only widen for European banks, which have given very little clarity on estimated losses ahead.
So far, the firms have said their exposures and potential losses are "manageable" and have pointed out that cheaper oil is a good thing for most consumers and companies.
That's right as far as it goes. But it's important to remember that for big banks fighting fires on several fronts -- from litigation to fixed-income losses to large-scale cost cuts -- investors have little patience for unwanted surprises.
A fresh bout of oil-price volatility would also have a long tail in the financial world, hitting everything from hedge funds betting on a rebound to emerging-market currencies. Europe's stock markets have broadly tracked crude's performance, as this chart shows.
Guessing the direction of oil prices has wrong-footed even the best experts in the field, who have bet on everything from $20 oil to $200 oil.
Banks shouldn't play that game. But they should use this earnings season as an opportunity to open up. As welcome as the March respite in market volatility was, it may not last long.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
(Corrects size of Citigroup's provision in chart entitled `Rainy Day'; corrects characterization of reserve-based lending in footnote.)
Although it's important to stress that European banks don't provide standardized reporting figures and U.S. banks are likely to have have greater exposure to loans directly backed by oil reserves -- loans that turned out to be far riskier than the lenders expected.
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