Wednesday, October 20, 2010

In the dark

According to Reuters, Luci Ellis of the RBA said today that:

Financial institutions will have to share more information on their activities with authorities to lessen the risk of another global financial crisis... it was important that regulators could detect the build-up of risk and leverage as it happened and where the risk was concentrated. "All of these concerns imply that financial institutions will be expected to report – and disclose – more information than in the past...Financial stability analysts don't just need accurate data: we need more data, new analytical tools and in some cases a broader approach to that analysis."

This is a bit rich isn't it? The RBA wants more information even though it and APRA won't give the market any. As discussed in the Invisopower! post, we are all in the dark about what precisely are the individual banks' wholesale debt positions and their respective maturity profiles, as well as who used the guarantee.

This blog understands that since the 1997 Wallis Inquiry, Australian financial system architecture has been divided in two. On one half, we have deposit-taking institutions whose capital ratios are controlled and policed by APRA. On the other half, we have market mediated credit, that is disciplined by the efficiencies of an informed market and governed by ASIC.

If we look at the letter of the regulatory law, regulators might be within their rights to withhold information on banks.

However, during the GFC, both halves of the architecture collapsed. The efficient market hypothesis turned out to be a chimera and when stressed, market mediated credit froze and originators disappeared. RMBS have only been issued since by dint of AOFM giveaways.

Similarly, when under stress, bank liabilities overwhelmed both the RBA and APRA safeguards. They needed a Budget guarantee.

There are, therefore, acute public interest questions to be answered about both halves of the regulatory structure around credit mediation. A gigantic moral hazard working at the heart of the both is hardly a solution.

Back to the article, Ms Ellis concludes:

"...When I am at international meetings, I sometimes hear my counterparts complain that they cannot get all the data they need from the supervisor." Ms Ellis said. "I'm glad to say that in Australia we don't have that problem."

Could have fooled this blogger.

1 comment:

Anonymous said...

First Maxim of a Central Banker: Never tell the Truth.