Investors assign a risk premium to bank equity and debt in response to the limited transparency of bank financial statements. A recent study by the CFA Institute, a global investment industry professional standards organization, showed that banks' price-to-book ratios have been depressed — less than one — since the financial crisis started. Considered a headline measure of the financial soundness of banks, price-to-book ratios compare current share price to book value. The study also demonstrated that the capital markets' measures of risk, such as credit default swap (CDS) spreads, hint at an incremental risk aversion to the banking sector, which translates into relatively higher-risk premiums, lower stock prices and lower price-to-book ratios. It also found that banks' cost of equity had exceeded the return on equity since the beginning of the financial crisis. Vincent Papa, author of the CFA Institute paper and member of the Enhanced Disclosure Task Force (EDTF), told Compliance
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