Thomas Hoenig: bank accounting masks risk of banks

Bloomberg reports that FDIC Vice Chairman Thomas Hoenig wants bank accounting changed so that it properly reflects the risk of the banks.

Specifically, he wants to force the banks to include their off-balance sheet exposures on their balance sheets.  For derivatives, this means showing the gross amount of exposure and not the net amount of exposure.

Regular readers know that accounting for financial institutions actually creates opacity.  It creates opacity because it hides the risk of the individual exposures in summary accounts.

The only way to convey the risk of each bank is to have the banks provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

With this information, market participants can assess the risk and solvency of each bank.  Without this information, market participants cannot assess the risk and solvency of each bank because accounting turns them into 'black boxes'.

Warning: Banks in the U.S. are bigger than they appear. 

That label, like a similar one on automobile side-view mirrors, might be required of the four largest U.S. lenders if Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., has his way. 

Applying stricter accounting standards for derivatives and off-balance-sheet assets would make the banks twice as big as they say they are -- or about the size of the U.S. economy -- according to data compiled by Bloomberg. 

“Derivatives, like loans, carry risk,” Hoenig said in an interview. “To recognize those bets on the balance sheet would give a better picture of the risk exposures that are there.”