Thursday, July 12, 2012

Bank of England Andrew Haldane: restoring trust will require 'cleansing of banking stables'

In his Times column, the Bank of England's Executive Director, Financial Stability Andrew Haldane observed

As recent events illustrate, restoring trust in our banking system is an urgent priority. To do so will require at least three things. 
First, a thorough cleansing of the banking stables so that errors of the past — from bad loans to bad advice — are no longer a drag on investor and customer confidence.  
Second, a reconfiguration of the structure of banking so that in future basic services are no longer contaminated by investment banking activities. Key to that is faithful implementation of the proposals of the Independent Commission on Banking. Indeed, we may need “Vickers plus”.   
Third, we need a regulatory structure that promptly identifies risks that might emerge across the financial system and protects households and businesses from them.
Regular readers know that the first and third items on Mr. Haldane's list to restore trust in our banking system requires the banks to provide ultra transparency and disclose on an ongoing basis their current asset, liability and off-balance sheet exposure details.

The only way that market participants are going to trust that the banking stables have been thoroughly cleansed and there is nothing to hide is if they can verify this fact for themselves.  It is only with ultra transparency that market participants have all the information they need.

As your humble blogger has repeatedly observed, the only way we can have a regulatory structure that promptly identifies financial system risks and protects the real economy from them is if there is ultra transparency so the market participants can independently assess the risks and adjust their exposures based on their assessment.

This returns trust in the banking system as market participants trust their own independent assessment and take comfort from having the Financial Policy Committee there to backstop them should they fail to identify a risk.

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