Regular readers know that the simplest and toughest bank regulation is to require the banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.
With this information, market participants can assess the risk of each bank and exert discipline to restrain risk taking.
With this information, market participants can exert discipline to force the banks to take the losses currently hiding on or off their balance sheets. While hard on banker bonuses, this is good for the real economy and bank earnings in the future.
Rather than showboating from MPs, we need a forensic approach to the banking scandal....The focus should be on how banks set up an opaque system for setting the Libor interest rate and then preceded to manipulate the rate.
Although the inquiry has yet to begin, certain conclusions already suggest themselves....At the top of the list is that opacity needs to be eliminated and the bright light of transparency shone into all the opaque corners of the financial system.
The disquieting suggestion by Barclays that the Bank of England either connived at its manipulation of the Libor lending rate, or simply did not understand what was going on, bodes ill for the Bank’s re-assumption of regulatory responsibilities once the Financial Services Authority shuts up shop.
All the pages of regulation in the world (and the Financial Services Bill comes close to containing them) will do no good if the quality and expertise of the Bank’s personnel remain so inferior to those of the institutions it oversees.Which is why requiring the banks to provide ultra transparency is so important.
With ultra transparency, the regulators can tap into the market's ability to analyze the banks rather than be dependent on its own internal expertise.
With ultra transparency, the regulators can harness market discipline to enhance the effectiveness of regulatory discipline.
Without ultra transparency, the markets are dependent on the expertise of the Bank's personnel. Expertise that did not prevent either the on-going financial crisis or the Libor Scandal. In the example of structured finance securities, expertise that is struggling with which is possible to value: the contents of a brown paper bag or a clear plastic bag.
Under any new system of regulation, the spirit of the law must be as important as the letter: bankers should be set clear standards of behaviour, with swift and exemplary punishment for those who transgress.....It is a lot easier to comply with the spirit of the law when sunlight is acting as the best disinfectant.
In the coming days, we shall get an idea of how the inquiry will operate, when Bob Diamond and Marcus Agius, Barclays’ chief executive and outgoing chairman, appear before Parliament.
Rather than political showboating and grandstanding from MPs, we need a forensic approach – a focus not so much on past misdeeds, as on what the two men can teach us for the future.A focus on how the bank used opacity to hide its manipulation of Libor and why requiring ultra transparency is necessary if we are ever going to restore trust in the banks again.
Banking is an enormously important industry, and it is vital that we have a system of regulation that is simultaneously simple, tough and effective.The requirement that banks provide ultra transparency is simple, tough and proven to be effective.