Of Special Interest
11th October 2011
SIFI comprehensive data disclosure proposals
The Financial Stability Board is proposing that the world's largest banks whose failure represents systemic risk for the financial systems of their home countries provide regular and comprehensive data in a standard format globally.
The FSB was asked to look at the matter by the G20 group of countries in 2009 and last week issued a discussion paper. In defining the problem the organisation stated: "Data gaps are an inevitable consequence of financial innovation and the ongoing development of markets and institutions. And no data initiative can substitute for effective policy design and judgement. However, in the recent crisis, the lack of timely, accurate information has proved very costly. The current data architecture lags well behind the forces driving increased complexity and globalisation of financial systems, institutions and markets. Importantly, there are major gaps in information on the globally active financial institutions that play a key role in the international financial system. There is little consistent information on the major bilateral linkages between such institutions, as well as on their interactions with other key financial institutions and markets across the world. As a consequence, there is a poor understanding of the global financial network which continues to hamper policy responses."
The paper examines risk under five headings:
- Concentration Risk
- Market Risk
- Funding Risk
- Contagion / Spill over risk
- Sovereign Risk.
There can be few rational arguments against the proposal, though a lot of detail is still to be worked out. The proposal however could still get stonewalled by the irrational - namely that many governments place a lot of prestige behind their national 'flag carrier' banks and may therefore find the truth inconvenient. Connected with this is the jostling for position with each country seeking to minimise any commercial disadvantage to its major banks, or prevent altogether. The Basel III proposals on the definition of Core III capital are still proving controversial many months on with individual countries still lobbying for changes to suit their way of banking and for local instruments to be included as Core Tier 1. Another case in point was that Fair Value writedowns of assets were inconvenient for certain nations' bank champions in 2008/09 and the European rules were amended to allow assets to be moved into categories where writedowns were no longer required. Some European banks finding Mark to Market on certain sovereign debt inconvenient did not do it with the full knowledge (connivance) of central banks and regulators. This raises the question as to whether countries will co-operate on providing the data which would exposure some of the weaknesses of their 'national champion banks'.
Added to this the 28 SIFI banks defined to date will also claim it is unfair on the grounds of cost and that it will be commercially unfair for them to have to do this and reveal commercially confidential information whilst other banks do not.
The FSB is seeking comments by 8th November. The paper can be downloaded at: