Thursday, May 10, 2012

Ireland's Patrick Honohan urges EU to take responsibility for regulating banks

The Irish Independent reports that Ireland's central bank Governor Patrick Honohan called for the EU to take responsibility for regulating banks.
EUROPE should take responsibility for regulating Ireland's banks and repaying bondholders of collapsed financial institutions, Central Bank Governor Patrick Honohan .... argued that a new pan-European regulator wouldn't be affected by national blind-spots like the Irish property bubble, and could therefore do a more effective job of supervising banks. 
If additional dispassionate eyes is the key to a more effective job of supervising banks, why stop with a new pan-European regulator?  Why not instead adopt ultra transparency and allow the market to assist in the supervision of the banks?
He also argued that paying off busted bank bondholders should be "the responsibility of a Europe-level resolution agency" and not of "stressed countries" and slammed the "irresistible" pressure for Ireland to preserve the European bond markets by paying off bank bondholders....
Regular readers know that in the absence of ultra transparency and the presence of regulators saying a bank is solvent there is a moral obligation to pay off busted bank bondholders.  The source of this repayment is the banks and not the host government.

This situation can be eliminated in the future by requiring the banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.  With this data, bondholders can assess the solvency of the bank.

As a result, bondholders become responsible for any gain or loss on their investment.
Failings in bank regulation were a major factor in Ireland's banking implosion, as supervisors failed to spot banks' ballooning credit risk, their dysfunctional funding bases and numerous other problems.
Since then, a new regulator and executive team has been appointed and a more robust regulatory approach established. 
The financial regulation functions have also been transferred back under the umbrella of the Central Bank.
The US had prior to the financial crisis and still has this regulatory approach.  It did nothing to prevent the crisis.
"In periods of collective national myopia such as that which generated the property bubble in Ireland, the chance of getting somebody whose judgment is not affected is greater, the more distant their base," he said.
"It's time to start the ball rolling in a direction going well beyond the current mandate of the ESRB (European Systemic Risk Board) and the ESAs (European Supervisory Authorities)."...
Please re-read the highlighted text as it makes the case for inviting the global market in to assist with bank supervision.  This is easily done by offering ultra transparency.
[There] would still be a role for nationals to be "involved in supervision" since "often it is they who pick up the vibes and the market talk". 
With ultra transparency, this market talk would be dramatically better informed.

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