Wednesday, July 4, 2012

BBC business editor Robert Peston: 'Is it ever acceptable for a bank to lie'

The BBC's business editor, Robert Peston, confirms the need for ultra transparency under which banks are required to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details by asking a simple question:
is it ever acceptable for a bank to lie?
Regular readers know that the answer is NO.  Inf fact, requiring banks to provide ultra transparency virtually eliminates their ability to lie about their financial condition or their cost of funds.

Regular readers also know that with the adoption of the Japanese model for handling a bank solvency led financial crisis "deception" is a necessary element as financial regulators continue to pretend that banks have positive book capital levels.

Examples of this charade include the bank stress tests and the 9% Tier I capital target.

Market participants know that positive book capital levels only exist because of policies like suspension of mark-to-market accounting and regulatory forbearance (under which zombie borrowers are kept alive through the use of 'extend and pretend' techniques).

As the OECD said, these policies render both bank book capital levels and capital ratios meaningless.

As reported by the Telegraph Live,
10.51 BBC business editor Robert Peston has asked if it is ever acceptable for a bank to lie: 
Barclays was among the least trusted of the banks. Investors, for years, feared they didn't properly understand how its complex investment bank earned its profits. Ministers and officials felt it was arrogant and opaque as an institution...
 A condition that ultra transparency would have cured.
Barclays' defence is that it was dreadfully unfair that its perceived borrowing costs were higher than other banks. And it is convinced that many [other] banks were even bigger liars than it was about what they were paying to borrow. 
It also points out that in practice its balance sheet, its finances, were in fact stronger than many of these other banks: its creditors were wrong, it would say, to have so little trust in it.
In finance, trust is a function of disclosure.  The more useful, relevant information disclosed in an appropriate, timely manner, the higher the trust level.

The reason for this is that market participants can independently assess this information and market participants trust this assessment.

If banks want to increase market participants' trust in them, they will provide ultra transparency.

Ultra transparency was the standard as late as the 1930s for banks and was the sign of a bank that could stand on its own two feet.
So was its lie about what it was paying to borrow justified - especially if the survival of the bank was at stake? And if Paul Tucker at the Bank of England encouraged Barclays to lie, as is implied by Diamond's memo, would he have been justified in doing so?

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