Donald Kohn's speech on enhancing financial stability: the role of transparency

Later posts will review Mr. Kohn's speech in greater detail, but what is important is that the Bank of England's Financial Policy Committee which is responsible for financial stability sees transparency as having a role.

Here is a quick review based on an article about the speech that appeared in the London South East,

Britain's banks should spell out in greater detail how they price assets on their books and calculate exposures to other institutions, a top policymaker said on Tuesday. 

The current practice of semi-annual reports and less complete interim statements may not give the public enough information to judge the strength of a bank, Donald Kohn, external member of the Bank of England's interim Financial Policy Committee (FPC) said.

Actually, market participants care little about how banks price the assets on their books.  Market participants want to know what assets are on the bank's books.  With this information, market participants can figure out for themselves, or use third party experts to figure out for them, what the assets are worth.

Only asset and liability-level data gives the public enough information to judge the strength of a bank.  This granular level of data happens to be what bank examiners use too in judging the strength of a bank.

The financial crisis that began in 2007 and continues in 2011 is vivid proof that bank financial reporting is inadequate for use in determining which bank is solvent and which is not.

 'In a world in which positions can be adjusted within minutes and soundness affected by daily economic and financial developments, even quarterly updates are not enough really to keep on top of a reporting institution,' he told an audience at the London School of Economics.

That is why asset and liability-level data should be released at the end of the business day.  This frequency of data ensures market participants that they know what is happening.

... 'Restoring confidence in the banks may well entail publishing more and better information about the banking book,' Kohn added.

Restoring confidence requires publishing all the information on the banking book.

... Kohn also welcomed improved information on complex instruments that were found at the heart of the financial crisis but warned against complacency. 

The FPC 'is concerned about backsliding as confidence returns -- about the re-emergence of complex instruments with chains of counter-party exposures that are not transparent or well understood,' he said. 

The FHFA lawsuit should serve to refocus both banks and investors on the need for current information on the underlying loan performance for structured finance securities.

He also touched on the shadow banking sector now the focus of global regulators who are trying to decide how this lightly regulated mix of money market funds, private equity and special investment vehicles should be regulated in future. 

Kohn suggested that rather than rushing headlong into regulation, better data collection and transparency 'probably should be tried first'.

Had the US done this, it would have saved us the Dodd-Frank Act.