Not all transparency is a good thing, warns Professor
A visiting Canadian economics professor has questioned calls for increased transparency in banking services.
Professor David Andolfatto from Simon Fraser University in Canada said authorities had to be careful about how much information is released to the public.
“We have to be careful here; what is needed is the ‘right kind’ of transparency, not the ‘wrong kind’,” he told a macroeconomics workshop at Deakin University in Melbourne.
Andolfatto likened the amount of information released to the situation where a fire is discovered in a crowded cinema.
“Yelling ‘fire’ in a crowded cinema is an example of the ‘wrong information’ to make public, as it would cause a stampede and half of the people would be killed,” he said.
“But telling the public there is an incident and allowing them to file out in an orderly fashion may kill the last two, but that is the ‘right information’.”
Andolfatto said releasing the wrong information today could cause a public run on banks, which is what happened in the US banking panics between 1863 and 1913.
During this period there were several panics where the public thought banks were about to fail and rushed to withdraw their deposits.
Each bank panic occurred at the cyclic peak of the US economy during that period.
“People knew that a recession was coming and that some banks typically fail in recessions; but not everyone knew which banks,” he said.
“So the information insensitive deposit liabilities suddenly become information sensitive deposits.”
To counter potential rushes on individual banks, a group of clearing banks introduced a number of measures, including the suspension of publishing accounting information on individual banks.
In that period there was no central bank to control the panic, as the Federal Reserve was not created until 1913, so the clearing banks had to take control to prevent a failure of the US banking system.
Andolfatto said while the US banking panics of more than 100 years ago were centred on retail banking and the current crisis focused on wholesale banks, there were similarities between the two events.
“In the last 25 years there has been a transformation in the financial landscape,” he said.
“There has been an enormous increase in world demand for information insensitive debt, both as a store of value (from emerging economies) and as collateral from derivative securities.”
Andolfatto said the authorities' response to the current crisis has to be carefully measured and they should look back in history to see how the previous ‘panics’ were dealt with.
“We need to be careful and avoid knee jerk responses,” he said.
“The response of our predecessors to banking panics were not to outlaw demand deposits, it was to facilitate the creation of riskless debt through insured demand deposits, combined with valuable bank charters and oversight.”
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