Saturday, October 15, 2011

G20 ministers should be careful what they wish for as they pressure EU for "impressive" response

According to a Telegraph article, the G20 ministers are applying significant pressure to the EU representatives (German, France and Italy) saying they expect an "impressive response" to the EU's sovereign debt and bank solvency crisis.

The single most impressive response the EU could provide is a combination of disclosure and financial support.

Disclosure would take two forms.  First, it would involve each nation's financial regulators disclosing what they know about the current condition of each bank they host.  Second, it would involve the creation of a data warehouse that would provide market participants with access for free to each bank's current asset and liability data.

There are two reasons for undertaking this disclosure.

  • First, disclosure will provide market participants with the data they need to assess each bank and answer the question of who is solvent and who is insolvent.  This in turn answers the questions: who is insolvent and can earn their way back to solvency;  who is insolvent, but can access capital from the marketplace; and who, if any bank, is insolvent and requires government assistance or must be closed.
  • Second, it involves market participants in both the assessment of the banks and the solution and as a result the process restores confidence.
The reason I said that the rest of the G20 should be careful what it wishes for is that if the EU response includes disclosure of each bank's current asset and liability-level data, this same disclosure would be expected of every bank hosted by the other G20 countries.

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