Ultra transparency, financial regulators and "the Cheerios Effect"

In his CNBC post, Bart Chilton, a commissioner on the US Commodities Futures Trading Commission, makes the case for why the global financial regulatory community should adopt ultra transparency.

Unlike all the other regulations that are being pursued, there is no ambiguity in what it means to require banks to disclose on an on-going basis all of their current asset, liability and off-balance sheet exposure details or structured finance securities to provide observable event based reporting.

The lack of ambiguity is what alls ultra transparency to be adopted globally.

In addition, since investors will reward banks that provide ultra transparency with a lower cost of funds/a higher stock price, there is an incentive for regulators to engage in a race to the top and embrace ultra transparency.  Investors will reward banks that provide ultra transparency because banks that do not provide ultra transparency will be assumed to be hiding something.

As the world’s financial markets become increasingly complex, folks charged with regulating these markets face the daunting task of trying to rein in out-of-control trading schemes that have played havoc on consumers (think MF Global), big banks (think JP Morgan), and even on whole economies (think euro zone). 

One thing is clear: financial markets are global, they are interconnected, and regulating them—to the extent possible—has to take on a universal theme.

Hence, the reason for adopting ultra transparency.

Many years ago, fluid dynamic scientists explained why it is that some floating substances attract one another. They called it "The Cheerios Effect." You may have seen this phenomenon played out if you’ve ever noticed how breakfast cereal tends to cluster together when the milk is added.... 

In the financial world these days, there certainly is tension and if we’re going to have the buoyancy to rise above it, we (like Cheerios) need to stick together. 

Two years ago, nations across the world, most notably Japan, the U.S. and the E.U. engaged an ambitious agenda to reform the world’s financial markets and to bring transparency to the over-the-counter trading world. Countries set out to do that a little differently but all recognized that, in a global economy, a regulatory race to the bottom was in nobody’s best interest. The country with the thinnest rulebook shouldn’t be rewarded for holding regulatory fire sales. 

Harmonization of regulatory regimes (sticking together) was to be a paramount goal. 

The problem today is that the work is not complete and there is temptation to do away with the very laws that were developed in reaction to the 2008 financial crisis and the all-to-close-to collapse of national economies. 

In the U.S., for example, there is a move afoot in Congress to repeal some or all of the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed only two years ago. Short of that goal, some would defund the very watchdogs which were given the rather Herculean task of keeping an eye on the Wall Street casinos. And, still others, including the casinos themselves, i.e. big banks, are choosing to fight the new regulations in court. Alas, just getting the rules in place is a immense challenge, let alone trying to harmonize them with other nations.....

Regulators around the world need solid structures in place to avoid having to revert to crisis control when things go haywire—be it in European capitals or in the steel canyons of Wall Street. Like Cheerios, we need to stick together to get sound rules written; get them implemented; and, harmonize them across borders wherever possible.