For a change of pace, I will let Economist Hyman Minsky explain the role of transparency in the financial system and how it is necessary so investors can Trust, but Verify.

The doctrine of transparency really reflects a recognition that the United States is a capitalist economy in which the corporate form of organizing business dominates. The transparency principle holds that truthful information, on the financial condition of corporations and of activity in those markets in which initial underwriting takes place and in which “second hand” securities are sold, was to be publicly available.  In addition, the markets in which financial instruments were sold and bought were to be free of manipulation, either by market makers, corporate management, or third parties.

The transparency principle is necessary for the operation of a market- rather than an institution-based financial system.  Revelations of scandals in investment banking, combined with the losses of investors as the Dow Jones fell to some 15% of its pre crash value, meant that by 1933 public’s confidence in the integrity of investment markets and in the wisdom in participating was low. The revival of confidence in banks and saving institutions was facilitated by Federal government deposit insurance.

There was no possibility of a similar government intervention to guarantee the value of other assets. Revival of confidence in market-based debt and equity financing required some guaranty of the integrity of corporate management and financial markets. The New Deal legislation founding the Securities and Exchange Commission set standards for corporate reporting and governance, for the information that needs to accompany a public offering, and for the operation of (and the flow of information from) second-hand markets for securities. One difference between economies with “universal banking” and economies with a division between what banks finance and what markets finance is in the public confidence in the integrity of markets and corporate governance. The securities and exchange legislation may well be one of the most successful reform efforts of the New Deal era: without it, today’s market oriented financial system would not be feasible.

Loan officers of banks are professionals, skilled in the evaluation of privately submitted and often confidential information about the operations of businesses, households, and government units that require financing. The loan officer joke, to the effect that he has never seen a pro forma that he did not like, accurately reflects the loan officer process, which seeks to transform the optimistic views of profit expectations put forth by potential borrowers into realistic expectations which can be submitted to and endorsed by loan oversight committees of the bank. The underwriting process, combined with the input of  security analysts, plays a similar role for publicly traded securities.

The remark about pro formas cited earlier identifies the role of loan officers in the chain of financing: loan officers are the designated skeptics of the economy, who nevertheless make their living by accepting risks they understand.  In market- based financing, underwriting and security analysts are assumed to play roles similar to that of banker, but the continuing commitment to both the borrower and the lender that often characterize a bank’s relations with borrowers and depositors is in general lacking in market-based financing arrangements.