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

It was clear when I had finished reading Mr. Kohn's speech that the Financial Policy Committee sees transparency as an important element to enhancing and maintaining financial stability.  In fact, it is viewed as so important that the first two policy recommendations of the FPC focused on disclosure of information on bank exposure to sovereign debt and other financial institutions.

In addition, Mr. Kohn commits himself and the other members of the FPC to learn about transparency.  He even urges graduate students at the London School of Economics to focus their research on transparency and its role in enhancing financial stability.

As regular readers are familiar with and the graduate students will quickly find out, this blog has provided the seminal work on transparency under the FDR Framework.

The parsimonious FDR Framework combines the philosophy of disclosure with the principal of caveat emptor (buyer beware).  Specifically,

• Governments are responsible for ensuring that market participants have access to all the useful, relevant information in an appropriate, timely manner; and

• Market participants have an incentive to use this information when making and monitoring an investment since under caveat emptor they are responsible for any gains or losses on the investment.

As an on-going case study, your humble blogger has examined the application of transparency under the FDR Framework using 21st century information technology to financial institutions and structured finance products.  This has allowed me to discuss the myriad issues related to transparency ranging from information asymmetry to accounting control fraud to a cost/benefit analysis to what data needs to be disclosed.

Rather than address each of the issues the Mr. Kohn brought up in his speech in an extraordinarily long post, I invite anyone interested in an overview of transparency to begin by reading some of the posts in the Guide to the FDR Framework.  

In addition, for those readers who want to dig down into some of the specific issues Mr. Kohn raises, I have linked some of my earlier posts.  I apologize in advance for the number of links, but I have literally written the book on disclosure for the 21st century under the FDR Framework and its role in enhancing stability for the global financial system.

• Issue:  Clarity is the purpose of disclosure
• Posts:  Clarity is the purpose of disclosure, The sell-side and its lobbyists take on the Brown Paper Bag Challenge

• Issue:  Information Overload, complexity and other objections to disclosure
• Posts: The sell-side and its lobbyists objections to disclosure, Lessons from Fed's $3.3 trillion loan data release, Disclosure is nice in theory, Consumers use information technology to over come opacity in pricing

• Issue:  What should be disclosed and when versus red herrings like revealing proprietary business strategies or how a bank values individual assets
• Posts: The sell-side and its lobbyists tactics to avoid disclosure,

• Issue: Market discipline
• Posts: Bank of England adopting 21st century oversight of financial institutions, The Future of Finance:  the end of opacity and the mother of all databases, Restoring market discipline

• Issue:  Contagion
• Posts:  Stopping the European Contagion Problem, Asset level data:  the firewall to stop European contagion and bailouts

• Issue:  Disclosure is not sufficient by itself to restore financial stability
• Posts:  Disclosure worked in the 1930s to restore confidence, will it work in 2011?, Financial markets under the FDR Framework

• Issue:  Cost of disclosure versus Benefit
• Posts:  Thank You Andy Haldane

• Issue:  Role for regulators when there is disclosure that allows financial institutions to actually face market discipline
• Posts:  Bank supervision under the FDR Framework, Regulators felt a 'sense of shame' over taxpayer funded bailouts, The RBS failure was preventable,  Financial regulators as source and perpetuator of financial instability,