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Friday, May 3, 2013

Another fight over transparency: Banks rally against strict controls over foreign bets

The NY Times has an excellent article on how banks are fighting against bringing transparency to their derivative positions and the proprietary bets they make using these instruments.

Under the Dodd-Frank Act, the CFTC is trying to require banks disclose the derivative positions held by their off-shore subsidiaries (think disclosure of the credit default swaps that JP Morgan booked through its London subsidiary).

The reason US regulators are interested in knowing what these positions are is that losses on these positions potentially could cost US taxpayers money should a bank fail.

Banks are arguing that this disclosure is unnecessary as the derivative positions are disclosed to the regulators in the foreign countries in which they do business.  Banks are saying that it is the role of these foreign regulators to ensure the safety and soundness of the foreign subsidiaries.

Translation: banks want to continue betting with US taxpayer money by placing their bets in their foreign subsidiaries and saying that US taxpayers should rely on foreign regulators to monitor these bets and make sure US taxpayers don't lose any money.

Those same foreign regulators who did not see the current financial crisis coming and effectively let their banks blow up.

Thank you, but no.

The simple response from the US government should be:

  •  if a bank wants to be able to offer US taxpayer backed deposit insurance on its accounts, then it needs to disclose on an ongoing basis its current global asset, liability and off-balance sheet exposure details; or
  • if a bank doesn't want to provide this level of on-going disclosure to all market participants, then it can no longer offer US taxpayer backed deposit insurance on its accounts.

Then, it is up to each bank to decide whether it wants to provide transparency.  Transparency that the Jamie Dimon and the Whale trade shows will limit proprietary betting for fear of the market trading against the bank's position.

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