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Monday, September 12, 2011

UK's Independent Commission on Banking Recommendations and Disclosure

Lost amid all the discussion about the UK's Independent Commission on Banking recommendations is the fact that successful implementation of these recommendations will require financial institutions to disclose their current asset and liability-level data.

The ICB separated the retail deposit taking bank from the casino bank.  However, in doing so, it makes disclosure a requirement.

For example, the retail deposit taking bank will have to meet higher capital standards.  These standards can be met in part by using "bail-in" or "contingent convertible" bonds.  No investor is going to buy these bonds if they cannot assess the risk they will be converted to equity.

The information investors are going to need is current asset and liability-level data updated on a daily basis.  Otherwise, buying these bonds would be no different than buying opaque, toxic structured finance securities.

For example, the casino bank is going to have to disclose its current asset and liability-level data otherwise no investor would invest in its debt.  Without this data, how would an investor know if the casino bank was solvent or not?

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