Geoff Bascand, Deputy Governor of the Reserve Bank of New Zealand, provided an excellent snapshot of the current state of central bankers’ understanding of financial transparency.  The snapshot shows central bankers do not understand financial transparency.

From the introduction to his speech,

One of the Reserve Bank’s key statutory purposes is a sound and efficient financial system.  So our interests are well aligned with stakeholders who want information on a financial institution’s performance, strength, and risk profile. Indeed the demand for meaningful market information is broad, ranging from depositors, policyholders, shareholders, creditors, through to rating agencies, credit and market analysts, and the financial media.

The Reserve Bank as the prudential regulator is also a ‘user’ of such information – it informs our policy settings (e.g. capital ratios) and information may inform a range of specific supervisory actions to address any concerns about an entity we might have (e.g. to assess solvency and associated risks).

I should note, however, the information set we have includes the same information that is provided to the public, as well as other ‘private’ information that institutions report to us, sometimes under compulsion of statutory powers. This latter set might be more granular, detailed or proprietary.  [emphasis added]

Like every other central bank engaged in supervision, the Reserve Bank has access to both public and private information from the financial firms it supervises.  What is the difference between these two types of information?  Private information is granular and detailed.  Why?  Because it is at the individual exposure level (think each loan, each investment security).

Hmmmm……

If granular, detailed data is needed for regulators to supervise a financial firm and assess its solvency, why isn’t this same data needed so the market can assess the risk of these firms and exert market discipline?

Regular readers know this is a trick question.  Of course, market participants need the same granular, detailed data if they are going to be able to assess the risk of these firms and exert market discipline.

The Information Matrix allows us to visualize public and private information.

Information Matrix

	Does Seller Know What They Are Selling?
Does Buyer Know What They are Buying?		Yes	No
	Yes	Perfect Information	Antique Dealer Problem
	No	Lemon Problem	Blind Betting

Supervisors are working in the Perfect Information quadrant.  All other stakeholders are operating in the Blind Betting quadrant.

So what is the story central bankers tell themselves to justify not requiring all the private data be made public?

Information may also be kept confidential to the Reserve Bank to avoid market disruption or because it may have a detrimental impact on an individual financial institution’s competitive position. In addition, there are constraints on public disclosure contained in our governing legislation³ which prevent public disclosure of that information except in prescribed circumstances. Those provisions allow regulated entities and the Bank to discuss sensitive commercial information in candour, which is a necessary element for prudential supervision.

Short version of the story:  if the data were made public, bad things would happen.

Hmmm…..

According to Mr. Bascand, central bankers believe if market participants knew the actual condition of the financial firms it would cause market disruption.  Really?

This suggests in their regulatory capacity the central bankers are hiding the insolvency of the financial firms.  They are doing so despite running annual stress tests and saying the banks can withstand financial armageddon.

If the central bankers aren’t hiding the actual condition of the financial firms, there is no reason to believe additional disclosure will create market disruption.  The additional disclosure should only confirm what the market thinks is the value of these financial firms.

As for the excuse additional disclosure might have a detrimental impact on a financial firm’s competitive position, this is a false claim peddled by the Opacity Protection Team.  Disclosing the granular details of a bank’s loan and securities portfolio doesn’t divulge any information that hurts a bank’s competitive position.  Why?  The bank has already made the loans or purchased the securities.  When it comes to loans, borrowers contact multiple banks and accept the loan they think has the best terms for themselves.  Disclosure doesn’t effect how borrowers get a loan.  What disclosing the loans does is allows market discipline to be exerted so banks don’t underprice their loans given the risk of the borrowers.

Mr. Bascand describes why central banks cannot disclose private information.  However, financial firms are not prohibited from disclosing this information.  This is very important.  There is no legal prohibition preventing these financial firms from disclosing the information investors need in order to know what they own.

There are some limits to what is sensible to disclose and when; such judgements can be quite contentious.  Moreover, we recognise that disclosure is not without cost.

Suspecting the story used to justify public and private data might not withstand scrutiny, Mr. Bascand throws out two more false claims made by the Opacity Protection Team.  These claims sandwich the critically important observation financial firms fight making any disclosures.

What data is sensible for a financial firm to disclose and when should this disclosure be made?  Since granular, detailed data is needed for supervision, this same data should be made public.  When is this granular, detailed data made available for supervision?  Since financial firm supervision takes place on site (think bank examiners), they get current data.  It is only reasonable the public should be able to access this same current data.  Hence, the reason it is a requirement to qualify for a label from the Transparency Label Initiative.

Having discussed what should be disclosed and when, we now move to the Opacity Protection Team’s claim disclosure is costly.  Again, this is false.  Financial firms keep their information in computer databases.  The expense of sharing the information in these databases is trivial.  Not only is it trivial, but it acts as a form of market discipline on the banks.  If a bank cannot report a position it has taken on, common sense suggests the bank is in no position to manage the position and therefore should be prohibited from taking on the position.

By now, it is clear the central bankers’ current understanding of financial transparency comes straight from the Opacity Protection Team’s hymnal.