Monday, September 24, 2012

Financial Times' Gillian Tett calls for 'see-through or ultra-transparent banking'

In her Financial Times column, Gillian Tett makes the case for why 'see-through or ultra-transparent banking' is needed to restore trust in the banking system.

... bankers should embrace another “s”: “see-through”, or ultra- transparent banking. 
A common thread of recent scandals is that they have invariably occurred in financial corners that are opaque and clubby. Just think of the Libor debacle or the collateralised debt obligation world. 
It is the opacity in these corners of the financial system that allow the bankers to engage in scandalous behavior.

If there was ultra transparency and banks were required to disclose on an ongoing basis their current asset, liability and off-balance sheet exposure details, Libor could be based off of all or a subset of the actual trades and market participants could independently confirm the trades.

Attempts to manipulate Libor would stick out.
This cannot be fixed just with vague promises about “transparency”, nor can it be resolved overnight. 
But banks need to put far more financial activity on exchanges, become more transparent about fees, reveal the profits they reap from deals – and how they pay their bankers. 
They should also back initiatives to use modern technological innovations to track global financial flows in real timeAfter all, as Daniel Goroff of the Sloan Foundation points out, in a world where high-tech computing is so powerful it can now track fish in the sea, it should not be that difficult to monitor financial flows. 
Ms. Tett and Daniel Goroff are arguing for real time transparency and making the case that it is doable from an information technology perspective.

Your humble blogger would suggest that while real time transparency would be nice, when it comes to banks and structured finance securities, transparency that is provided before the beginning of the next business day is sufficient.

For example, with observable event based reporting, market participants are informed before the beginning of the next business day of all the activities like payments or defaults that occurred with the collateral backing a specific structured finance security.  As a result of this reporting, market participants have current information.

Real time reporting would not be of additional benefit because payments are not cleared through the financial system in real time, but rather with a delay.
Transparency is crucial for trust....
Please re-read the highlighted text.
Whenever mistakes have occurred in finance in the past few years, these have usually occurred because bankers have been working in specialised ghettos, with minimal outside scrutiny. The presence of these silos makes it hard for outsiders to spot risks or abuses. 
As everyone knows, transparency and the sunlight it lets in is the best disinfectant.

With transparency, market participants can spot risks or abuses and exert discipline to restrain these risks or abuses.
But they also make it tough for insiders to retain common sense. Bankers in clubby ghettos become so gripped with tunnel vision that they fail to see the impact of their actions – or how offensive they might look. After all, as the novelist Upton Sinclair once observed, “it is very hard to make a man understand when his job depends on not understanding”. The tale of Libor is but one case in point.  
Of course, implementing those “s” words will be tough. Silo-busting, transparency (see-through) and stewardship fly in the face of the current banking world. But the stakes are huge. If a company such as IBM is disliked, nobody but IBM investors and employees suffer. A loss of trust in banks, however, threatens the economy as a whole.
The Blob (aka, financial regulators, Wall Street and its lobbyists) will work overtime to prevent implementing any of these "s" words, but particularly see-through (transparency).

As Yves Smith observed, nobody on Wall Street is compensated for developing low margin, transparent products.

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