Wednesday, October 31, 2012

Financial Stability Board calls for transparency and says banks should provide more data

As reported by Bloomberg, the Financial Stability Board is well on its way to embracing ultra transparency and banks disclosing on an ongoing basis their current global asset, liability and off-balance sheet exposure details.
Banks should increase the data they disclose to investors on how well they measure up to Basel capital rules and on their performance in internal stress tests, according to global regulators. 
Supervisors at the Financial Stability Board also called for lenders to disclose all off-balance sheet commitments, as part of a push to curb banks’ risk taking.
The only way that market participants can assess how well the banks measure up on Basel capital rules or internal stress tests is if the banks provide ultra transparency.  After all, model assumptions without the underlying data to test them on are completely worthless.

It is only with the exposure details that the market participants can independently confirm how the banks measure up on Basel capital rules or internal stress tests.
“Rebuilding investors’ confidence and trust in the banking industry is vital to the future health of the financial system,” an FSB task force said in an e-mailed statement yesterday. Better disclosure by banks of the risks they are running “is an important step in achieving that goal.”....
Please re-read the highlighted text as the FSB makes the same point that your humble blogger has been making about the need for better disclosure.  I am thrilled that the FSB agrees with me and my call for banks to provide ultra transparency.
Regulators have warned that banks avoided the full force of earlier Basel standards by using complex accounting procedures and off-balance sheet entities.
Ultra transparency end this issue.
Lenders should “outline plans” to meet the new Basel rules, and explain the models they use to measure their capital requirements, according to the report. 
Ultra transparency lets market participants independently assess the models and apply their own models to measure bank compliance with capital requirements.  One of the benefits of market participants using their own models is then the risks of the banks are all measured the same way.
Other data requirements concern the collateral held against derivatives trades, and whether such transactions have passed through clearinghouses. 
On stress tests, lenders should set out their internal procedures for running the exams, and explain the role they play in assessing capital needs.
With ultra transparency, market participants can independently re-run these stress tests and run stress tests with their own assumptions.
The FSB brings together regulators, central bankers, and finance ministry officials from the Group of 20 nations.

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