Thursday, December 6, 2012

Neil Barofsky says bringing transparency to banks at top of SEC to do list

In an interview by Matt Stoller that appeared in Salon, Neil Barofsky put bringing transparency to large financial institutions as the number one goal he would pursue if he headed the SEC.

Regular readers know that the way to bring transparency to the banks is to require the banks to disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

It is nice to have someone of Mr. Barofsky's stature championing your humble blogger's call for requiring the banks to provide ultra transparency.

Let’s wave a magic wand, and Neil Barofsky is appointed and confirmed to the SEC chairman position. What do you do to the SEC bureaucracy to achieve the goals you lay out for it, and what are those goals?... 
But look, I know, to me, the biggest priorities of where we are today in 2012 and where I think the agency should focus on going forward is fundamental stuff, that’s fairly obvious really. 
Transparency, being an agent for transparency in the markets. 
When you look at the big financial institutions … this is a financial crisis that was caused in part by a lack of transparency, by a lack of understanding of what was going on under the hood of a lot of these institutions, their exposure to certain assets, particularly real estate. Part of what triggered those great runs on Bear Stearns, and then Lehman, and then AIG, was a sense of the unknown. And that’s going to continue to trigger potential crisis. 
And at some point there are limits to transparency for legitimate business reasons. But I think overall our system can require a great deal more transparency without having major harm to these institutions, at least not in harmful ways that are relevant to the overall systemic stability.
Actually, when it comes to banks, the limits to transparency do not apply to their exposure details.  Rather, the limits to transparency apply to borrower privacy.  Specifically, loans made to individuals should be protected under the same privacy standards as medical records are protected under HIPAA.

When it comes to banks, legitimate business reasons protects only the internal models they use to value loans and securities.  Disclosing these models is not necessary as market participants have their own models for valuing loans and securities.

Every exposure on and off their balance sheet is a historical fact that market participants need to have access to if they are going to assess the risk of each bank.  Otherwise, as Deutsche Bank just showed, there is no way for a market participant to assess a bank's solvency.

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