Yesterday, the Wall Street Journal reported that the FSA would like to conceal the disclosure of emergency loans to troubled UK banks. The suggestion comes in the wake of the NRK crash, when there was a widely held belief that public disclosure of BoE emergency loans actually destabilized NRK rather than helping it.
There is a simple test of any new policy initiative; consider a few plausible hypothetical scenarios and see how the initiative would deal with them. For example, suppose there was a hypothetical bank – lets call it the Halicrap – that suddenly finds itself holding a pile of rapidly defaulting mortgage debt. The CEO of the Halicrap calls up the FSA and says that the bank needs some secret emergency financing. Sensing that the bank could be careering towards a bank run, the FSA agrees to give the bank some secret funding.
Suppose also that you are a shareholder of the Halicrap and you decide to buy an additional tranche of shares. Since the Halicrap and the FSA conceal the funding difficulties from you, you buy these additional shares without fully understanding the health of the bank. Since you are also an existing shareholder, you have a right to know the true financial position of the bank. After all, the CEO is, technically speaking, working for you and not the FSA. You have a right to know what the CEO is doing on your behalf.
Consider another hypothetical bank – say the Royal Bank of North Britain – who decides to give a line of credit to the Halicrap. Again, the fact that the Halicrap is secretly receiving money from the state would materially affect whether the Royal bank would extend a credit to the Halicrap. Suppose further that the Halicrap subsequently became bankrupt, it is not hard to see plenty of useful employment for lawyers as the Royal Bank argues, with some justification, that the FSA withheld information that adversely affected the financial position of creditor banks.
A third group of individuals also has a right to know the financial activities of the FSA and the central bank – the taxpayer. These emergency loans are public resources. It seems reasonable that the use of public resources should be open to scrutiny.
Disclosure is the key principle of our financial system. Stock market listed companies must disclose all significant information about the financial health of the company. Otherwise, people can not make informed decision. If investors fear that information is being concealed, they will demand higher returns to compensate for the risk.
Some might say that the end justifies the means. It might be better to tell a little white lie in order to prevent a banking collapse. It would be a much better strategy to strengthen banking regulation rather than concealing emergency help as poorly regulated banks begin to fail. At the margin, a secret emergency credit line facility might actually delay decisive regulatory action.
My dear old grandmother had a neat phrase to describe situations when people conceal information. How did she put it? Yes, I remember, she called it lying. She had a few other words; deceit; dishonesty, and deception.