Institute for Financial Transparency

Shining a light on the opaque corners of finance


Banks’ Seduction of Their Regulators to Continue

For years, I have made the deliberately exaggerated statement:  if banks disclosed their current exposure details, bank examiners would never have to step foot inside a bank (yes, I know because I received training in bank examination at the Federal Reserve there are some tasks bank examiners must visit the banks to perform).

Why did I make this exaggerated statement?  To highlight the fact, it is easy for bankers who are great storytellers to seduce their regulators when they are the ones in possession of all the facts.  Economists call this regulatory capture.

Transparency ends regulatory capture.  Before visiting with Bank of America, regulators can sit down with JP Morgan/other banks as well as investors and find out what concerns them about Bank of America (visa versa before visiting JP Morgan, sit down with Bank of America).

When going into meetings with the bankers, not only will the regulators have the “facts”, but they will also have a pretty good grasp of how these facts should be analyzed and the conclusion of this analysis.

Of course, the bank will try to pull the wool over the regulators’ eyes.  However, this doesn’t achieve much.  The market also knows the facts, how to analyze the facts and the conclusion of this analysis.  The market is perfectly capable of exerting discipline on the banks to address problems and exert discipline on regulators to enforce regulations.

Why do I bring this up?  The Trump Administration and its appointed financial regulators have decided regulatory capture is good.  They prefer bankers being the only party with the facts and being in position to mislead the regulators with their stories.