Stock banking groups after international financial crisis 2008 was supposed to be easy and uninteresting: more capital, more compliance, less risk of trade explosions. The idea was that shareholders would settle for a lower return on equity in exchange for a more stable and predictable business model. However, this ideal construction has been undermined by recent events. One of the conclusions drawn is that it is dangerous to buy shares of large and complex banking groups, even if at first glance they seem cheap.

Much harder to understand how banks compared to most other types of companies. First, their value is determined by a highly leveraged balance sheet. Thus, focusing on annual revenues, costs, and profits runs the risk of missing the point. Derivatives that are not clear at first glance, illiquid securities or securitized loans can lead to large losses.

Before Credit Suisse reported a $5.5 billion loss from the collapse of Archegos Capital Management’s investment funds, few investors are likely to have heard of her client or been involved in his longtime stock market core business. It is true that a bank’s earnings often affect the corresponding share price. Just look at the valuation gap between high-yield Morgan Stanley and Goldman Sachs.

Equally important to shareholders, however, is the risk of near or outright liquidation, as demonstrated in the case of Silicon Valley Bank and Credit Suisse. That’s why JPMorgan CEO Jamie Dimon likes to talk about “stronghold balance.” Risk management, not quarterly returns, is what really matters.

Therein lies the second difficulty: opacity. Banks publish a huge amount of financial information, especially since the imposition of repressive regulations after the 2008 crisis. However, the most important information is often hidden. No investor could have known that Credit Suisse allowed Archegos to fund its deals with insufficient cash collateral. Admittedly, some financial groups are more likely to ignore the beaten path than others. Perhaps investors could factor this element into their valuations. But everything is changing.

The German Deutsche Bank, for example, seemed too prone to errors and pitfalls until it suddenly stopped doing so. It is also noteworthy that even regulators, who have much better information and access to manage the situation, often lag behind. Just look at FINMA, the industry watchdog in Switzerland, which highlighted Credit Suisse’s supposedly strong financial position just days before delisting its own securities and helping to orchestrate a deal that UBS would bail out.

Regulators themselves are another source of uncertainty. Financial institutions are of paramount importance to the rest of the economy and are also politically toxic, leading to frequent unpredictable regulatory policy actions. Europe’s chief banking supervisor, Andrea Enria, has banned dividends and share buybacks during the pandemic, although banks’ capital levels have not fallen to the levels that such measures would normally cause.