Wednesday, February 8, 2012

Money market mutual funds provide more transparency than banks

As banking regulators attempt to expand their turf and regulate the shadow banking system, I hope that they remember that some of the so-called shadow banks actually provide more transparency in their disclosures than do the heavily, regulated banks.

As Federated Investor's John Hawke observed in an American Banker column,
Volcker’s somewhat evocative characterization that [money market funds] are "truly hidden in the shadow of banking markets" conjures up an image of fly-by-night firms operating surreptitiously in the darkness of back alleys.  But with 30 million investors and $2.6 trillion in assets, MMFs are hardly unseen, hidden or surreptitious.  
Not only are they subject to significant control, examination and oversight by the Securities and Exchange Commission, with detailed prospectus requirements for the issuance of their shares, demanding reporting requirements, regular surveillance, and substantial requirements as to liquidity, asset quality and maturities, but they must publicly and frequently disclose the contents of their portfolios, on their websites and in regulatory filings – down to the individual security level.  
And, of course, they must satisfy the standards and evaluations of the rating agencies, which in some respects are even more demanding. To suggest that MMFs exist in a hidden "shadow" world simply distorts reality. 
Please re-read how money market funds publicly disclose the contents of their portfolio down to the individual security level.  This reflects what a securities regulator thinks is necessary for a 'shadow bank', in this case the money market fund, to disclose so that market participants have access to all the useful, relevant information in an appropriate, timely manner.

Please note that even though they provide individual security level disclosure, money market mutual funds do not provide this disclosure frequently enough (under ultra transparency, it would be updated so it is always current).  In 2008, one of the funds had invested in Lehman and suffered losses.  Since investors did not know what that fund or the other funds owned at the time, there was a danger of a run on the funds.

Had there been ultra transparency, investors could have seen what the funds owned and realized that there was little reason for concern.

As the Bank of England's Paul Tucker observed, over the last 30 years, banks and capital markets have fused.  Unfortunately, bank disclosure has not adjusted to this change.

Bank disclosure reflects the combination of the fact that bank regulators have access to ultra transparency and the belief that therefore other market participants didn't need to have ultra transparency.  As a result, market participants must rely on the regulators to assess the risk of each bank and convey this risk to the market.

The financial crisis that began on August 9, 2007 has shown that bank regulators cannot be trusted to either properly assess the risk of each bank or convey the result of their assessment to the market.

As a result, the regulated banking sector needs to be subjected to similar disclosure requirements of the money market fund 'shadow banks' and have to report their current asset, liability and off-balance sheet exposure details.

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