Wednesday, June 6, 2012

Will the Systemic Risk Council champion ultra transparency?

The NY Times reports that Sheila Bair, the former chairwoman of the FDIC, is coordinating the establishment of the Systemic Risk Council, a group to encourage strict oversight of Wall Street.

According to Ms. Bair,
“The great challenge is to devise a system to identify risks that threaten market stability before they become a danger to the general public,” she said. 
“We need a more effective and efficient early-warning system to detect issues that jeopardize the functioning of U.S. financial markets before they disrupt credit flows to the real economy.  
And two of the most critical tasks are how to impose greater market discipline on excess risk-taking and effectively end the doctrine ‘too big to fail.’ ”
Regular readers know that requiring banks to provide ultra transparency and disclose on an ongoing basis their current asset, liability and off-balance sheet exposure details is the answer to her great challenge.

This is the data that market participants need if they are to identify risks and adjust their exposures so that the risks do not threaten market stability and the general public.

This is the data market participants need for effective and efficient early-warning so that the flow of credit to the real economy is not disrupted.

This is the data market participants need to exert discipline and restrain excess risk-taking.

This is the data market participants need to end the doctrine of too big to fail.  All financial institutions can fail when there is ultra transparency.  

With ultra transparency, market participants know they are responsible for all gains and losses on their exposures.  To protect against losses, market participants have an incentive to assess the risk of each financial institution and to adjust their exposure to reflect this risk and make sure it is not more than they can afford to lose.

Since ultra transparency handles her greatest challenges and provides other benefits, will Ms. Bair and the Systemic Risk Council champion it?
Efforts to increase and improve regulation of Wall Street have bogged down, according to Sheila C. Bair, the former chairwoman of the Federal Deposit Insurance Corporation.  
On Wednesday, she will announce a new group, the Systemic Risk Council, that will monitor and encourage regulatory reform.... 
The Dodd-Frank act passed in 2010 provided for numerous steps, including the creation of an Office of Financial Research that was supposed to help the newly created Financial Stability Oversight Council in identifying threats to financial stability and deciding which financial firms were systemically important and how much additional regulation they should receive. That council is composed of all the major regulatory bodies, and so far it has accomplished little.... 
By design the Office of Financial Research will accomplish little.  It is a direct assault on the idea of providing transparency to market participants.  The office is suppose to collect data and only disclose the results of its analysis.

Given that everyone agrees that markets are superior at analyzing data to a few regulators, it is clear that the intent of the Office of Financial Research is to continue to protect opacity in the financial system as well as the dependence of market participants on the regulators properly assessing risk in the financial system and disclosing this risk.
Efforts to reform the private mortgage securitization business have gone nowhere.
Ms. Bair led an effort at the FDIC that was notable for how quickly it caved into lobbying from the sell-side.
In many areas, Ms. Bair said, “nothing has been finalized. F.S.O.C. is M.I.A. O.F.R. is barely functional. The Volcker Rule is mired in controversy. Securitization reform is stalled. They haven’t even proposed new bank capital rules. The public is becoming cynical about whether the regulators can do anything right, which is undermining support for reforms.”...
Which is why requiring ultra transparency is so important.  It ends the dependence of the financial markets on the regulators to do a job that they are not up to doing.
The new group, which expects to begin issuing reports quickly, will include a long list of former regulators and officials from both parties, including former Senators Bill Bradley, Democrat of New Jersey; Chuck Hagel, Republican of Nebraska; and Alan K. Simpson, Republican of Wyoming. It will also include Brooksley E. Born, a former chairwoman of the Commodity Futures Trading Commission, whose efforts to fight deregulation in the Clinton administration failed, and Paul H. O’Neill, the first Treasury secretary under George W. Bush. 
Others include John S. Reed, the former head of Citicorp, and Hugh F. Johnston, the chief financial officer of Pepsico. Mr. Volcker is listed as a senior adviser. The organization is being formed by the Pew Charitable Trusts, where Ms. Bair now works, and the CFA Institute, an organization of financial analysts. 
“Despite the magnitude of the financial crisis, prospects for major reform of regulatory systems are inadequate and vague,” said John D. Rogers, the president of the CFA Institute and a member of the new group. “This council will serve as an essential sounding board for systemic risk reforms focused on strong investor protection, and offer a critical voice to promote the enforcement of regulations, financial disclosure and transparency.”
A statement that would naturally leads one to conclude that the council will strongly endorse requiring ultra transparency in its very first report.

Of course, not strongly endorsing ultra transparency in its first report would also signal something significant.  It would show that the Systemic Risk Council does not understand the role of opacity in our current financial crisis.

1 comment:

Anonymous said...

The SRC can best be utilized as a LIE Detector.
The Bank CEOs along with the ineptitude of US Government Accountability Agencys have become experts in being able to LIE the LIE.
We have traded a sound banking system for a pocket full of mumbles such is the Dodd Frank Act.
Because the Bank CEOs LIE the LIE, I wish the best for Shiela Bair and the SRC in being that LIE detector.
As a Commercial Banker, I am ashamed of the negative ripple effect that our the Banking Industry has on our planet. I challenge the all Bank CEOs to STOP THE LIE!
It is well within your power to do so.