By calling for pledged asset level disclosure, the BIS has moved one step closer to joining your humble blogger in advocating that banks disclose all of their exposure details.
Regular readers know that it is only with each bank disclosing its asset, liability and off-balance sheet exposure details that market participants, including competitor banks and investors, can assess the risk of each bank.
Banks should disclose the assets they pledge as collateral for loans so that investors have a better gauge of risk, according to a committee of the Bank for International Settlements....
“Transparency about the extent to which bank assets are encumbered or are available for encumbrance will allow unsecured creditors to better assess the risks they face,” according to the report.
After the financial crisis of 2008, banks’ funding models changed, with collateralized borrowing gaining a bigger role. Using assets such as government bonds as security reduces what’s available to be sold to pay unsecured creditors should there be a default and increases the cost of winding up the institution.