Saturday, February 19, 2011

Geithner, like Haldane, thinks bank supervision needs improvement

In his interview with the Financial Crisis Inquiry Commission, Tim Geithner seconded the observation made by the Bank of England's Andy Haldane about the need to improve the basic craft of supervision.

As regular readers of this blog know, the only way to meaningfully improve the basic craft of supervision is to follow the FDR Framework and insure that all useful, relevant information is made available in an appropriate, timely manner to all market participants.

Disclosure of this information allows the banking supervisors to benefit from the financial markets' ability to understand what this information means and take action based on this understanding.

For example, for all structured finance securities and financial institutions, current asset-level data reported on an observable event basis would be disclosed.  With this data, the credit and equity market analysts, as well as competitors, could independently analyze the risk of and value each security and financial institution.  This would lead to liquid trading markets for the securities and market discipline for the financial institutions.

In addition, this would free the banking supervisors from reliance on asking the firms they regulate for a sophisticated understanding of the regulated firms and the markets.  The banking supervisors could now ask a significant number of fully informed, independent experts. [emphasis added]
Geithner told the panel that supervision of U.S. financial institutions eroded during years of stability and needs to be improved. 
Supervisors aren’t “paid very much, they don’t get much training,” he said. “They don’t spend any time in the market. They’ve got a much less sophisticated understanding of the institutions they’re supposed to supervise than they would need to do it effectively.” 
Geithner said “nothing would make me happier than to have a bunch of generals come in and figure out how to improve the basic craft of supervision and make it tougher again.”
Providing all the useful, relevant information in an appropriate, timely manner to all market participants would create the necessary condition for a bunch of generals to come in and improve and toughen supervision. 

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