Tuesday, May 8, 2012

Andrew Kahr lays out why dependency on financial regulators must end

In an American Banker column, Andrew Kahr looks at what is required of financial regulators and concludes they simply cannot do all that is asked of them.

Regular readers know that your humble blogger has been making this point.  My solution is to require the financial institutions to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposures.

With this data, the market can assist the regulators in the assessment of the bank's asset quality, capital (solvency) and liquidity.
The last clear chance to avert disaster was detection in the examination process of the toxic mortgages banks were originating, whether or not they had already sold these mortgages. 

How could examiners have missed the multiplicity of loans to borrowers with little or no skin in the game, and or with unknown or unbelievable incomes? How about the mortgages with potential for negative amortization and dramatic, unaffordable payment increases? 
I don't think the explanation for this is gross stupidity, carelessness or crookedness on the part of examiners and supervisors. A much more plausible reason for their dramatic and universal failure is that Congress has mandated regulators to do far too much....  
Assets are more important than any other determinant of bank solvency. ... 
Let's have examiners who focus single-mindedly, relentlessly on asset quality and on contingent liabilities for assets sold. Who should do this? ...
Why not the market.  The market after all exists to value assets.
Of the new regulations elicited by the crisis, not many aim to deter bad assets. 
We need urgent progress towards a more pointed and reliable asset examination process — not a wacky debate about Qualified Residential Mortgages, safe harbors and the alleged need for the megabanks to be internationally competitive. Competitive with whom? The Spanish banks?  The British banks? The Chinese banks? They all share the same fatal defect: bad assets.

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