RBS report heralds tighter rules for Bank of England

The Telegraph ran an interesting article on the impending release of the report on RBS.  The article noted how the failures of the Financial Services Authority in supervising RBS will impact the Bank of England, which is absorbing the FSA's bank supervision responsibilities.

Specifically, the report will provide ammunition for much tougher oversight of the central bank.

Regular readers know that your humble blogger believes that opacity in the financial system cannot be eliminated unless bank regulators are required to provide utter transparency too.

In a financial system characterized by utter transparency, banks would disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.  Included in the liability disclosure would be any borrowing from the central bank regardless of whether it is from the discount window or some other central bank liquidity program.

All market participants need banks to provide utter transparency if they are going to have all the useful, relevant information in an appropriate, timely manner for assessing each bank.  For example, they could assess if the loans from the central bank were for temporary liquidity or to prop up an insolvent bank.

It is only with the ability to independently assess each bank that the market participants can adjust the amount and price of their exposure to each bank to reflect this assessment.

With this independent assessment comes the end of reliance on the regulators for their assessment of a bank's solvency.  With the end of reliance on the regulators' assessment of solvency comes an end to needing to bailout investors in banks.  Investors willingly accept the potential for gains as well as losses.

With utter transparency, bank supervisors truly can focus on analysis of the banks and not on rule writing.  As this blog has previously mentioned, bank supervisors will be able to tap the analytical ability of the market, including a bank's competitors, for help in their analysis of each bank.

So what type of information would bank regulators disclose if banks are already providing ultra transparency?

The results of their bank examinations.

One of the benefits of disclosing the findings of their bank examinations is that market discipline can reinforce regulatory oversight in getting banks to address risks.

Disclosing the results of the bank examinations eliminates the situation where a bank can appeal to a more senior regulator to have the results of the examination overturned.

Please note, utter transparency does not have to apply to monetary policy (although I suspect it would be beneficial if it did).

Bank officials and other senior regulators are concerned the Financial Services Authority’s (FSA) report into RBS’s failure will provide ammunition for those calling for much tougher oversight of the central bank. 

The Treasury Select Committee (TSC) and the key Parliamentary joint steering committee overseeing the passage of next year’s Financial Services Bill are expected to use the report’s findings to push for more powers to ensure the accountability of the Bank to politicians in the event of a future crisis.... 

Publication of the FSA’s report follows a political backlash last December after Lord Turner, the regulator’s chairman, said the document could not be published.
George Osborne, the Chancellor, and Andrew Tyrie, chairman of the TSC, reacted with fury, forcing the FSA into an embarrassing U-turn on the issue. 

“Parliament should never be expected to go through this sort of to-do again. These powerful regulatory bodies need a higher level of accountability and a stronger duty to explain what they have done,” said Mr Tyrie last week. 

Last month, the TSC released a report on the Bank that slammed its governance structure as “weak” and called for a beefing up of its Court, the Bank’s governing body, with the appointment of more independent directors. 

The TSC also argued the Chancellor should be handed an override clause to enable the government to take charge of the central bank if a major lender were to come close to the brink of failing. 

Bank officials are understood to be prepared to make concessions. However, one source said Sir Mervyn King, the Governor of the Bank, was “fighting like an alley cat” against some of the more sweeping changes. 

A draft of the Financial Services Bill is set to be published as early as this week and the RBS report will be seen as an important piece of evidence for those who say the new regulations must include tougher provisions to ensure that bodies such as the Bank and the new Financial Conduct Authority are held accountable for their actions.