Henry Kaufman: with ultra transparency, 'big banks are not the future'

In his Wall Street Journal column, Henry Kaufman added his voice to the ultra transparency bandwagon by observing that information technology is the key to better market discipline of the banks and most likely will drive the Too Big to Fail banks to break-up.

Dodd-Frank includes various provisions to discourage recklessness among the giants, but regulation is not the solution. While enshrining the leading financial firms as "too big to fail," the new legislation imposes on them a long list of strictures—of "dos" and "don'ts"—for controlling their behavior. But a well-run financial system cannot be micromanaged through elaborate regulatory codes.... 

Which is why banks need to be required to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.  With this data, markets can exert discipline on bank management to restrain its risk taking.

Imposing higher capital requirements on these big institutions also is not the way to go. Will such higher requirements actually remove or minimize the many conflicts of interest noted earlier? I don't believe so. Indeed, higher capital requirements may well encourage more risk-taking. 

In addition, higher capital requirements are leading to a credit crunch...

The power of leading financial conglomerates is being narrowed in other ways. Their inventiveness in introducing new financial products and marshaling new technology allowed them to outrun regulators for decades. The gap is now narrowing. Even though supervisory authorities initially were slow to perceive the implications of securitization and to respond appropriately to the rapid growth of derivatives, the landscape is much clearer now. In the wake of the 2008 crisis, neither regulators nor investors see these innovations as reliable ways to diversify risk. Large financial institutions will need to work hard to develop new techniques for expanding credit that are acceptable to regulators. 

Information technology, once the handmaiden of leading financial conglomerates, now serves regulators. It is not difficult to imagine a day in the near future when credit flow information—data on trades, loans, investments, changes in liabilities, and so on—will flow instantaneously from financial institutions to official regulators.

Please re-read the highlighted text as it is not just official regulators who could access this information instantaneously, but also other market participants should banks be required to provide ultra transparency.

In the somewhat more distant future, the entire demand deposit function probably could be taken over by governments through a network of computer facilities in "the cloud." Even more likely, within a generation branch banking will become obsolete as the general population (not just early adopters) conducts all its banking on hand-held devices.

Clearly Mr. Kaufman believes that information technology is going to fundamentally change the banking industry.