Financial Reform:Transparency is the Enemy

Ogden Nash said that progress is good if it isn’t overdone. I’ve long felt the same about transparency as my following verse indicates.

Transparency is a current central banker cause
But it reminds me too much of sausages and laws
I think translucence, like my shower door, is a good compromise
It lets in the light, but keeps out the flies. 

 

Watching laws being made has become more distasteful than ever, especially banking laws, in an environment where lawmakers compete to outdo each other in the popular sport of bank bashing. Reasonable, thoughtful, financial reform legislation is probably needed, but being reasonable and thoughtful risks being labeled as soft on banks. Soft on banks and soft on Wall Street are two different things, but such distinctions are risky in the current competition to win the populist of the year award.

Under normal circumstances shining light on the legislative process is probably a good thing—if not overdone. In the current poisoned environment, however, the TV cameras only add to the dysfunction. Our only hope of having the few adults in Congress exert a moderating influence in the reconcilement process is to turn the cameras off and have the meeting in a dark smoke-filled room.

Since Wall Street investment banks (present and past) are not the same as Main Street commercial banks, we had harbored some hope that the efforts to punish the former might spare the latter. However, that was hoping for too much.

Two recent developments, if not stopped or reversed, promise to do much damage to the entire banking system, large and small, and thus the economy. One is the recent announcement by the Financial Accounting Standards Board (FASB) of their intention to apply mark to market accounting rules to banks’ entire balance sheet, including loans as well as securities. The only way I can understand this is as retaliation by an out-of-control agency that was embarrassed last year by their submission to Congressional pressure to modify (slightly) existing M2M rules for banks, and the success their forced reversal had. They are back, mad, and doubling down.

The other misguided effort, if not reversed, will hit community banks like a ton of bricks with no obvious benefit to safety and soundness. That is the amendment, sponsored by Senator Susan Collins, to exclude trust preferred securities from Tier 1capital of banks and in the capital calculations of small bank holding companies. Senator Collins said she didn’t intend for her amendment to affect the capital treatment of small bank holding companies. If so, the amendment was a mistake that passed the Senate by unanimous consent (voice vote).

Banking regulation is serious business. It is complicated, and fraught with abundant opportunities for unintended negative consequences. Until this orgy of bank bashing subsides, let’s turn the cameras off and bring some experts into the room. These days transparency is not Congress’ friend.

Comments (5)

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  1. Jon says:

    I have a question about understanding the Federal Reserve System that I would like clarified. Are each of the 12 Federal Reserve Banks private corporations?

  2. Bob McTeer says:

    Jon:

    Yes and no. When a bank becomes a member bank of the Federal Reserve System, which is required for national banks but voluntary for state chartered banks, they must by stock in their local Federal Reserve Bank based on a percentage of their own capital and surplus. So, the stockholders of the Fed Banks are their member banks. However, such “ownership” includes virtually no rights. The Reserve Banks have public goals and are not run by their stockholders. The member banks do get a dividend on their stock, but that is also based on a formula. They do participate in the election of some of the directors, but all the actions of the local boards must be ratified by the Board of Governors in Washington.

    Bob

  3. Bob McTeer says:

    Jon again:

    Buy, not by.

  4. Jon says:

    Thank you for clearing things up. Often we hear the conspiracy theorists say the Federal Reserve is just as Federal as Federal Express. That is clearly not the case.

    As a Federal Reserve Bank president, do you carry out any of your own policy or is it all dictated from the Board of Governors?

  5. Per Kurowski says:

    What the Congress does not understand it cannot fix.

    Have you ever heard about a financial crisis that happened from lending or investing in anything considered risky? Of course not, these have all started with lending or investments to something that offered more returns than what its perceived low risk merited. Even the infamous Dutch tulips, in their own bubble time, would probably have been rated AAA.

    That is why the current paradigm of assigning lower capital requirements to what the credit rating agencies perceive as having lower risk, like if they possessed some extraterrestrial sensorial abilities others don’t, is plain ludicrous. That only increases the expected returns from what is perceived as having no risk… precisely what would be prescribed for a financial heart-attack.

    And since the Congress and the G20 do not yet get that, do not hold your breath waiting for any major progress in financial regulatory reform.

    Also, to allow financial regulators to focus so excessively on the risk that lies closest to their heart, namely the risk of default, is, in a world with so many other risks, like the AAA rated BP can attest to, plain scandalous.

    The biggest risk for society is that our banks will not perform efficiently their role in allocating capitals and it is always better for them to fail when taking real and worthy risks than to survive or fail taking useless Potemkin risks!