Friday, October 21, 2011

All the accounts that are fit to print

The Financial Times carried a must read column by Gary Silverman titled All the accounts that are fit to print.  The column confirms all the benefits that this blog has attributed to disclosure under the FDR Framework and its applicability to banks.
Bankers need role models like anyone else, and I believe I have found one for our financial friends in an unlikely place – a trade-journal article written 80 years ago about a small bank that no longer exists. 
The story ... details a remarkable moment in US financial history. 
Consider this: in Chicago, during the Depression, the First National Bank of Englewood published “the most complete possible” statement of its accounts in a double-page advertisement in a local newspaper, the Southtown Economist. 
The advertisement, the report said, “lists every bond the bank owns; it gives the price the bond is carried at on the books of the bank and the value at the market; it gives a complete list of the commercial paper holdings of the bank with the names of firms. In addition, it details its customers’ loans and without mentioning names, classifies these loans and lists them by maturities.” 
Perhaps I have spent too much time as a financial journalist, but I found this disclosure positively inspirational. This was a bank that wanted to be understood – and it’s hard to express just how rare that is in today’s baroque financial world. 
Nor was this the act of a liberal do-gooder or self-serving publicity hound. The First National Bank of Englewood wanted to be understood because it did not want to be tightly regulated – transparency in those days was the mark of a banker who could stand on his own two feet....
It still is!
James Grant, editor of Grant’s Interest Rate Observer and the go-to guy on Wall Street when you need someone with a memory, says ... “A bank ought not to be a blind pool,” Mr Grant says. “I think [Nichols] was one of the great unsung heroes of the 20th century and all contemporary banking.” 
The curious thing to me is how few of our leading bankers today are responding to calls for greater regulation of their businesses by embracing their inner Nichols and trying to better explain their operations to their communities....
But I think the time has come for banks to move in a Nichols-like direction. I’m sure they would complain at first, but I suspect many of their revelations would ultimately work to their benefit.... 
As this blog has explained, banks perceive that they profit from opacity and they have Opacity Protection Teams to make sure that no-one, including regulators, can understand what they are doing.
As a newspaper person myself (with a mortgage), I also can’t help but harbour the fantasy that today’s banks would follow the example of the First National Bank of Englewood and detail their operations in the pages of their favourite (maybe salmon-coloured?) papers. 
But I fear that print publications would lose this business to the websites of the banks themselves, which, after all, have the technological abilities to reproduce the reams of data needed for a Nichols-like presentation.
Actually, it should be done using a data warehouse that is controlled by a conflict of interest free third party.  The data should be provided for free to all market participants.  Since the data warehouse is only in the business of providing access to this data and not controlled by a government, the data can be trusted when it is used by market participants to assess the riskiness of the banks.
I know many of you are already wondering whether it would be possible for any actual human being to read a listing of all the loans and investments of one of our bigger banks. 
But I would respond with a question of my own: if it isn’t possible for a single person to read such an account, how is possible for a single chief executive or a single board of directors to supervise such an account?
The fact is that the same systems that banks use internally can also be used on their competitors' disclosed data.  As a result, it is possible to have market participants make sense out of the data and take actions based on their assessment of the risks.

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