Sunday, July 15, 2012

Financial Times' Martin Wolf calls for 'significantly greater transparency'

In his column, Martin Wolf, the chief economics commentator at the Financial Times and member of the UK's Independent Commission on Banking (the Vickers Commission), calls for significantly greater transparency to clean up the banking 'cesspit'.

The Libor scandal has nailed the coffin of the banks’ reputations shut. After a huge financial crisis and a long list of scandals, banks are now viewed as incompetent profiteers run by spivs. Such disgust over what Paul Tucker, deputy governor of the Bank of England, has called a “cesspit” is quite natural. But disgust alone must not shape reform. 
Here are my seven suggestions of how best to respond. 
First, accept that misbehaviour is going to happen, particularly where so much money is at stake. It is good that the public reacts strongly, since that will discourage managerial insouciance. But let us be realistic: bankers are in this for the money and, like it or not, always will be. 
Second, there are ways of lowering the risk of such a scandal being repeated: heavy penalties are one, more transparency another. Data for actual transactions should be used. Transparency is no panacea for the ills of banking. But it would help....
Please re-read the highlighted text as it is a remarkable statement.

Regular readers know that transparency is not a panacea, but rather an elegant solution that cures a number of the ills of banking.

Are there other regulatory changes that should be implemented?  Yes, absolutely, most definitely.

Mr. Wolf points out a really good starting point for what these additional regulatory changes should be.
Sixth, the case for implementing all the recommendations of the Independent Commission on Banking, of which I was a member, is now even stronger. In particular, it remains vital that banks be easily resolved, in the event of mishap: ringfencing of the retail banks, where continuity of service is essential, should facilitate this. 
It is also vital to ensure that subsidiaries and the group as a whole have both sufficient quantities of equity to be credibly solvent under nearly all circumstances, and sufficient loss-absorbing debt to be resolved, should they get close to the margin of insolvency. In brief, banks need a large margin of safety, at all times. 
The ringfencing of retail banking should also reduce its contamination by the short-term trading culture of investment banking. This is one reason why the government should reconsider its decision to let retail banks provide “simple” derivatives. But do not be naive about this: retail banks can both misbehave and fail.... 
My favorite part of combining adoption of transparency and theVickers Commission recommendations is that it results in restoring our financial system so that it can function without extraordinary government intervention.
It is understandable that recent scandals have enraged the public. But rage is always a dangerous basis for policy. The days when the local bank manager was almost as respected as the doctor have long gone. We are never going to turn bankers into saints. 
But we can change the incentives facing bankers, the structure of banking and the focus of regulation. Where I would go further is towards substantially lower leverage and significantly greater transparency....
We cannot hope for miracles. But we can make bankers more useful and less dangerous. 

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