Specifically, there needs to be much more disclosure on both sides of the balance sheet so that investors can assess what is going on.
Regular readers know that the only way to shed light into the black box that is a bank is to require each bank to disclose its current asset, liability and off-balance sheet exposure detail. This is the data that investors need to assess the risk of the bank.
Banks remain too much of a black box and more needs to be done to give investors a better idea of the level of uncertainty surrounding their balance sheets, senior Bank of England official Andrew Haldane said on Monday.
Published annual accounts did not do a good job of informing investors of the impending financial crisis before it hit, Haldane, the central bank's Executive Director for Financial Stability, said.
"A lot more can and probably should be done to shed a little light on both sides of the balance sheet," he told an event in London's Canary Wharf financial district.
"Globally, banking remains too much of a black box which is why, for many investors today, banks are scarcely an investible proposition."
While such large and complex portfolios of assets are difficult to value, giving investors a sense of the margin of error would help, he said.There are plenty of market participants with the expertise to value bank portfolios including all of the global financial institution competitors and money management organizations.
If these firms cannot value a bank's portfolio, it is a sign that the bank is in fact to large and complex. As a result, the bank should be shrunk.
With current detail disclosure, this will happen naturally. The bank will be paying a premium to access funds because its risk cannot be assessed. This market discipline will encourage the bank to shrink down to a size where other market participants can in fact assess its risk.