Fed stress tests confirm need for ultra transparency

The Wall Street Journal ran an interesting article on the Fed's bank stress tests.  What makes the article interesting is that it confirms your humble bloggers observation that ultra transparency is needed to evaluate the solvency of the banks.

Specifically, banks must be required to disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

Please note the trends in the Fed's data requests from the first round of stress tests to the current round of stress tests:  more frequent and more granular.

One new frustration for big banks is that the information requested by the Fed is changing. 

This year the Fed began requiring banks to submit data on a monthly and quarterly basis, in addition to the annual submission. Banks must also submit much more granular information, including dozens of details about individual loans. 

Fed officials say the new data gives them the information they need to build their stress-test models and to see banks' risk-taking over time. 

The trend is clear:  the Fed is headed towards ultra transparency as they know it is the data they need in order to truly assess the solvency of each bank.

Banks say the Fed has asked them for too much, too fast. 

Some bankers, for instance, have complained the Fed now is demanding they include the physical address of properties backing loans on their books, not just the billing address for the borrower.  Not all banks, it turns out, have that information readily available....

The Fed has backed off some of its original requests after banks protested. 

For example, the Fed announced Sept. 28 that it wouldn't require chief financial officers to attest to the accuracy of the data submitted after banks and their trade groups argued that the still-evolving process was too fresh and confusing for any CFO to be able to be sure his bank had gotten it right. 

Banks needed more time to build up the systems and controls to report data reliably, the Fed said. 

The problem here is not the Fed's asking for detailed data.  The problem here is that these banks are blowing smoke about the capabilities of their information technology systems.

If banks lack critical information for managing a loan portfolio, like the physical address of the collateral, it should show up in their CAMEL rating as at least a 2 point increase in the rating (CAMEL ratings go from 1(best) to 5(close the bank's doors)).  Not knowing where the collateral is for a mortgage calls into question the quality of both the assets and management.

Based on the banks' difficulties in producing the requested data, requiring the banks to provide ultra transparency would be very useful.  Then, the Fed could simply download the data it wants.

Also please note that the banks complain about how the Fed conducts its analysis.  If there were ultra transparency, then each of the banks could analyze the other banks and we could see it their assessments produced similar conclusions as the Fed's.

The clash centers on the math regulators are using to produce the results. Bankers want more detail on how the calculations are made, and the Fed thus far has resisted disclosing more than it has already. 

A senior Fed supervision official, Timothy Clark, irked some bankers last month when he said at a private conference they wouldn't get additional information about the methodology, according to people who attended the event in Boston.  

Wells Fargo & Co. Treasurer Paul Ackerman said at the same conference that he still doesn't understand why the Fed's estimates are so different from Wells's.

With ultra transparency we could find out why the Fed's and Well's estimates differ so much and also what do other market participants think.  As an added bonus, with ultra transparency we can re-open the interbank lending market and eliminate fraud in calculating the Libor interest rate.