Tuesday, August 23, 2011

UK MP demands that banks reveal exposure to sovereign debt

According to an article in the Telegraph, Andrew Tyrie, the chairman of the House of Commons Treasury Select Committee is demanding that banks reveal their exposure to sovereign debt to the Bank of England.

As regular readers know, the Bank of England is only one of the market participants that needs this information.  The rest of the market participants need this information if they are to properly assess the riskiness of banks in the UK.
Concern about sovereign debt has been at the heart of the past fortnight’s market volatility, which has seen share prices in UK banks collapse in scenes reminiscent of the financial crisis of 2008. The Royal Bank of Scotland lost 20.7pc of its value in the past week, closing at 21p on Friday night, a price not seen since early 2009. 
Mr Tyrie, the Conservative MP for Chichester who has been at the forefront of lobbying for change in the way the financial services industry is regulated, said he will speak to the Bank about the role of the fledgling Prudential Regulatory Authority (PRA) in this area. 
The PRA, which will take on macro financial regulation once the Financial Services Authority (FSA) is disbanded at the end of next year, is expected to take a more robust approach to regulation once it is formed. 
Speaking this weekend, Mr Tyrie said: “Most people are agreed in many respects we have had a burdensome but relatively ineffective form of regulation in this field. There’s a lot that needs to be done to put it right.” 
He went on to question the FSA's style of regulation, adding: "Smart regulation has to replace box ticking."
True and the first step in smart regulation is disclosure of the current asset and liability-level data for each financial institution.

This disclosure allows the regulators to enlist both the analytical ability and discipline of the markets.
 Mr Tyrie believes that major banks should be disclosing not just sovereign debt but other data which may pose a risk to the system.
Although he is aware that not everything can be disclosed, for competitive reasons, regulators and the banking industry should come to a flexible agreement on what constitutes a risk and what investors and authorities need to know.
Actually, there is very little that should not be disclosed (primarily, this falls into the category of preserving the privacy of individuals).  Everything else should be disclosed.

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