He provides further confirmation that regulators create stress in the financial system.
Central-bank support got the world's banks through the 2008 crisis. But secrecy around the recipients of such largess make it a double-edged sword that can create, as well as reduce, stress in the system.
If a bank seeks aid, it is a scarlet letter and may bring on a full-blown panic in that institution. Yet as the financial crisis showed, secrecy carries its own cost. If investors know an institution is under the gun, but can't tell who it is, that can undermine confidence in all firms.Please re-read the previous highlighted sentences as they summarize a point that this blog has made repeatedly.
Opacity creates systemic problems. It transforms a financial problem from being firm specific to being a global problem.
The latest example: the Federal Reserve's dollar-swap program. This injects dollars into the global bank market via currency swaps with other central banks and is intended to prevent foreign banks from running out of greenbacks.
In late June, the Fed extended the emergency-lending program with the central banks of England, Canada, Japan, Switzerland and the European Central Bank. This month, banks tapped the program, picking up $500 million through the ECB and $200 million through the Swiss National Bank.
This unnerved investors, who were left wondering who might face a dollar shortage. Was a big bank in trouble? Maybe it was the Geneva office of a French private bank simply in need of dollars? The worries became so severe that Switzerland's biggest banks, UBS and Credit Suisse Group, both were forced last week to deny they needed the $200 million.
Meanwhile, the central banks involved are staying mum, fueling investors' guessing game.
Clearly, there is no easy way out of this central-banking quandary.Actually, there is an easy way out of this quandary. That way is to have all financial institutions disclosing their current asset and liability-level data.
If this disclosure were available, market participants would not have to guess who is borrowing. They would know. More importantly, they would know if the bank that was borrowing was solvent or not.