IMF and BIS economists make case for disclosure of bank exposures to address systemic risk

The mainstream economic community is discovering the need to require banks to provide ultra transparency so that systemic risk can be addressed.

In a VoxEU article (hat tip NakedCapitalism), economists from the IMF and BIS observed

The current global crisis highlights how interconnected the financial world has become. This interconnectedness is a challenge for global systemic risks analysis. 

This column argues that much of the data needed for tracking systemic risk are not available and that, in fact, world decision makers are leading in the dark. 

Recent initiatives that aim to improve aggregate banking statistics and gather better institution-level data are welcome, but the complexity of the system means that we won’t have the data we need for some time yet.

Regular readers know that we won't have the needed data until banks are required to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

The starting point for systemic risk analysis for a single-country is typically the banking system. A systemic risk analysis involves the use of disaggregated national bank data, including information on the composition of banks’ asset and liabilities, maturity and currency mismatches, and other balance sheet and income metrics. 

These national-based analyses then attempt to capture systemic risks stemming from common exposures, interbank linkages, funding concentrations, and other factors that may have a bearing on banks’ income, liquidity and capital adequacy conditions. ...

Our approach ... does not, however, directly extend to the multi-country level for a number of reasons:... 

• Scarcity of data that capture the international dimensions of systemic risk 

Supervisors in each jurisdiction have access to granular data for banks operating in their jurisdiction. However, the supervision of internationally active institutions relies on data collection practices that tend to differ across jurisdictions. 

Each national supervisor protects their information monopoly on all the useful, relevant information on the banks hosted in their countries.

Moreover, confidentiality concerns generally restrict the sharing of data, even within the supervisory community....

Confidentiality is a red herring.

The information that is needed to assess risk does not need to be nor is it protected by national confidentiality rules.

As the global financial crisis has made clear, despite the difficulties of the data and some institutional challenges, analysing systemic risks in international banking is nevertheless an activity with high rewards. What existing data can be used and brought to bear on this issue? 

To start, it is important to note that tracking global systemic risks requires the joint analysis of data covering many financial institutions. Common exposures to a particular asset class or funding source are easily masked in aggregate data. 

To detect vulnerabilities requires data at the individual bank-level, collected in a consistent and comparable format, so that aggregation is possible.

And the way to do this is to require the banks to provide ultra transparency.

• Bank-level data obtained by national supervisors contain some of the needed information. 

But the experience during the crisis showed that, in many jurisdictions, supervisors lacked critical pieces of information, specifically, data on how international banks are connected to each other. 

During periods of market turmoil, real-time information on how the failure (or not) of a particular institution might impact other institutions is crucial for policy decisions, but was lacking in the days leading up to the collapse of Lehman Brothers. Thus, for crisis management purposes, there is a need for more information on bank-level bilateral linkages. 

• The bank-level data that are collected by supervisors are not widely shared, generally not even across supervisory jurisdictions, and only broad aggregates (if at all) are publicly disclosed. 

No single supervisor therefore has a comprehensive, yet detailed overview of the global system. And without such a view, system-level vulnerabilities can go undetected. 

It was difficult (even late in the crisis), for example, to gauge the size of European banks’ global exposures to US dollar centralised debt obligations, and there was virtually no system-level information on the scale of these banks’ reliance on short-term dollar funding (e.g. money market funds), which dried up suddenly amidst the turmoil. 

Detecting these types of stresses early on requires detailed breakdowns of banks’ assets and liabilities (i.e. by currency, instrument, residual maturity and, if possible, counterparty type and country), and their joint analysis across many banks. 

• Bank-level data available outside the supervisory community are generally not detailed enough. 

Commercial databases compile information from banks’ annual reports, but have considerable data lags and gaps. Information on the counterparty-sector and country are generally missing, and coverage of branches is particularly poor. In many countries, standard balance sheet data (e.g. capital asset ratios) are not even publicly disclosed -- or are disclosed without much detail....