Policymakers are obsessed with capital, and it's easy to understand why. It is central to confidence in the banking system. It is quantifiable. It's tangible.
Those are all good things, and everyone agrees a solid banking system is founded on a sound capital base.Actually, a solid banking system is founded on asset-level disclosure. When credit market analysts can value all the assets, then and only then, do we know if a bank is solvent.
But the focus on capital may be creating a false sense of security, and it may be overshadowing other, equally important issues that are central to preventing the next crisis, like how well banks are managed and how well supervisors do their jobs.As regular readers of this blog know, the regulators' fixation on capital is one of many blind spots. These blind spots prevent them from taking the necessary steps to restore a solvent banking system and perpetuates the current financial crisis.
Your humble blogger absolutely agrees with the American Banker's observation that the focus on capital overshadows issues that are central to preventing the next crisis. The issue that is overshadowed is the disclosure of asset-level data.
With asset-level data, the credit market analysts working for investors and other financial institutions would be able to assist the supervisors/regulators in doing their job. For example, they would alert the regulators if a bank were not well managed or were taking on risks that threaten the solvency of the bank by exerting market discipline - sell ratings, reductions in lines of credit, etc....
This is precisely the banking environment that everyone wants as it produces a stronger banking system.