Financiers are becoming increasingly concerned that many taxpayer-backed borrowers are losing their ability to access private funding markets.This is a direct result of the current disclosure practices of these borrowers that leaves them resembling, in the words of the Bank of England's Andrew Haldane, 'black boxes'.
Nobody can tell which bank can repay a loan and which bank cannot.
Regular readers know that the solution is to require 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 information, market participants can assess the risk of each bank and adjust the amount and pricing of their exposures.
The development raises the prospect of already heavily indebted eurozone national governments being forced to take on hundreds of billions of euros of additional debts.This solution of government bailouts was previously tried and it has not prevented the current freezing up of the interbank loan or unsecured bank debt markets.
“Cracks are appearing in the funding markets for these institutions. If you don’t like the sovereign risk, why would you take the risk of buying the debt of the institutions they support,” said one credit banker.By requiring ultra transparency, sovereigns can address both aspects of this objection.
First, the linkage between the banks and the sovereigns is broken. The source for recapitalizing the banks becomes future retained earnings and banker bonuses and not bailout funds.
Second, market participants can independently assess the risk of each financial institution. The market participants can then invest based on their own risk assessment.