Friday, May 4, 2012

IMF wants Spain to conduct a review of opaque banks' bad assets

According to a Wall Street Journal article, the IMF wants Spain to conduct a review of its banks' bad assets before deciding what to do with these assets.

Actually, Spain should instead eliminate opacity in its financial sector by requiring the banks to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.  With this information, the market can determine which assets are bad and what they are worth.

The market discipline brought by ultra transparency will pressure banks to take several steps to clean up their exposures.

First, the banks will write down the bad assets to the market's estimate of their value.

Second, the banks will clean up their exposures by restructuring or selling the assets that were written down.

The Spanish government needs to do no more than require ultra transparency and re-affirm the sovereign deposit guarantee.

Spain must first conduct a comprehensive review of its banks' bad assets before a final decision is made on whether to spin those assets off into a special firm, the International Monetary Fund warned Thursday. 
It is "critical to do the due diligence of these banks' assets before taking a final decision" on a bad-asset bank program, IMF spokesman Gerry Rice said.
Does Gerry Rice work for BlackRock Solutions?  After all, BlackRock Solutions has made a considerable amount of money conducting due diligence on banks in Ireland and Greece that has not resulted in anything beyond a great payday for BlackRock.
"In the meantime banks should be urged to clear as much as possible off their balance sheets," Rice said.
Yes banks should.  And they should also be required to provide ultra transparency so that market participants can confirm that the banks have cleaned up their balance sheets.
A comprehensive review of the financial sector's assets would not only give markets clarity on the depth of Spain's problems, but also likely force the banks to clearing the dead weight--largely real estate mortgages--off their balance sheets.
A comprehensive review of the financial sectors' assets does not give the markets clarity on the depth of the banks' problems.  It only gives clarity to the firm conducting the review.

Only ultra transparency gives markets clarity on the depth of the banks' problems!
The opaqueness of Spain's financial sector problems has fueled market concerns, driving up Madrid's borrowing costs to near unsustainable levels.
The opaqueness of the financial sector, not just Spain's, has fueled market concerns.  As pointed out by Sir Mervyn King, it was the inability to determine which banks were solvent and which were not because of this opaqueness that caused the financial markets to freeze at the beginning of the financial crisis.

The only way to end opacity and guarantee that market participants have access to the data they need to determine which banks are solvent and which are not is to require banks to provide ultra transparency.

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