Federal Reserve Bank of Kansas City President Esther George said supervision of individual banks should be strengthened to increase transparency in financial markets and safeguard the broader financial system.
Supervision can be made more systematic, predictable and transparent by making reports from complex firms more easily understood so that shareholders and creditors can “provide the appropriate level of market discipline,” George said in remarks prepared for delivery in Paris. Without transparency, investors must rely on assurances from regulators that they are ensuring “sound conditions” at the biggest banks, she said.
Since the 2007-2009 financial crisis, regulators around the world have tightened banks’ capital standards, focusing especially on the biggest institutions deemed essential to stability. U.S. agencies including the Fed are still implementing tougher regulatory standards under the Dodd-Frank Act more than three years after it became law.
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“Today’s global institutions, with their systemic footprints, can easily turn the complexity of their operations into opaqueness,” George said at a Bank of France conference on financial regulation. “The annual reports of major institutions do not include simple disclosures, but contain a nearly unending stream of footnotes that attempt to describe their operations because of the legal liability of saying something that might prove to be misleading.”
Regulators should make simpler rules that are “easily understood by the public and readily enforced by examiners,” George said. They also should promote transparency and market discipline by making disclosures that the public understands and disclosing key findings from bank examinations, she said.
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