Thursday, May 10, 2012

Blaming Spain's central banker for woes confirms need for ultra transparency

The Financial Times reported on the politics going on in the assignment of blame for the Spanish banking crisis.

In looking to assign blame, the politicians confirm that the financial system must be reformed so that financial stability is not dependent on regulators.

The only way to end this dependence on regulators is to break their information monopoly and require the banks to provide ultra transparency and disclose on an on-going basis to all market participants their current asset, liability and off-balance sheet exposure details.
Vicente Martinez-Pujalte, economy spokesman for the ruling Popular party, criticised Miguel Ángel Fernández Ordóñez, governor of the Bank of Spain, for failing to identify the problems among Spain’s banks in his role as their supervisor. 
“There is a governor of the Bank of Spain that, despite being able to count on some magnificent professionals, has not done a good job,” Mr Martinez-Pujalte said in an interview with Madrid regional television.  
He accused the Bank of Spain of forcing inappropriate mergers, resulting in Bankia’s nationalisation. 
“The Bank of Spain obliged Rato [former Bankia chairman] to take charge of Bancaja with data that at best were not exact,” Mr Martinez-Pujalte said, referring to the merger between Caja Madrid and the troubled Valencian savings bank Bancaja that formed the bulk of Bankia.... 
In assigning blame, Mr. Martinez-Pujalte makes the case for requiring ultra transparency.

First, he highlights the 'regulators speak with one voice' problem.  Even if some of the 'magnificent professionals' disagree, they still have to convince the governor of the Bank of Spain to adopt their position.  Until they can do that, the market only hears the governor's position.

Second, he highlights that a bank merger occurred 'with data that at best were not exact'.  There is no excuse with the ready availability of 21st century information technology not to have access to 'exact data' on each bank.  With ultra transparency, Rato would have had access to exact data on Bancaja.
The criticism of Mr Fernández Ordóñez comes as officials and bankers have noted that Spain’s central bank had become increasingly sidelined by Luis de Guindos, minister of finance and the former head of Lehman Brothers in Spain who was the driving force behind this week’s Bankia intervention.
So naturally, the solutions that Spain will adopt will be banker friendly (think bailouts).

The solutions won't reflect the simple fact that bank bailouts are unnecessary in a modern financial system likes Spain's that has deposit guarantees and access to central bank funding.
A senior Spanish banker accused the Popular party of targeting Mr Fernández Ordóñez for political reasons.The PP had strong ties to Bankia, where Rodrigo Rato, a former PP economy minister, was chairman until this week. 
“The stakes are so high right now that the politicians need to look for guilty parties,” the banker said. “Yes, you can blame the Bank of Spain, but they are opening a Pandora’s box. The market regulator, investment banks and many others can all be labelled as culpable.” 
This was the conclusion reached by the Nyberg Report on the Irish financial crisis.

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