Monday, October 24, 2011

Thank you Simon Johnson for using European crisis to make the case for banks providing detailed disclosure

In case you did not see Simon Johnson's excellent post on European Debt:  The Big Picture, he focuses on what is not in the NY Times' graphic A Spectator's Guide to the Euro Crisis.

Specifically he focuses on the lack of reliable data on US bank exposures to Europe and how this lack of data forces investors to guess what should be a readily knowable fact.
But you might think also about what is not in the NYT graphic because we lack reliable information.  For example, what is the exposure of US financial institutions to European debt, directly or indirectly, through derivatives transactions of any kind? 
The opaqueness of derivative markets means that most investors can only guess at what could happen.  Most of the relevant regulators and supervisors with whom I have talked seem also to be largely in the dark – remember the experience of AIG in 2008. 
Cross-border bank exposures through loans and other holdings are publicly disclosed – data from the Bank for International Settlements are represented by the arrows in the NYT graphic.  These data are surely not perfect, but they do convey the main points and they tell you where to focus attention. 
Why do we not require publication of similar data, preferably by financial institution, for all derivative transactions – including both gross and supposedly net exposures across borders?
Why not and while we are at it why not disclose each bank's detailed asset and liability account data so we can know the true degree of exposure and interconnectedness?

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