Risk Management

05:30 PM
Greg MacSweeney
Greg MacSweeney
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Don’t Leave Home Without ... Bank Status?

The Federal Reserve's ill-conceived decision to provide bank's with anonymity makes the entire process less transparent and only further contributes to the industry's poor reputation and lack of investor confidence.

Being a bank is so cool! In fact, it's so cool that everyone is doing it.

Talk about peer pressure. For decades, investment banks on Wall Street were the cool place to be -- banking deposits were, yawn, boring. How quickly things change. After watching Morgan Stanley and Goldman Sachs not even think twice about becoming banks, now American Express has become a bank, too. I can hear the new motto now: "American Express -- don't leave home without bank status."

One of the attractions of becoming a bank is the ability to tap into loans from the U.S. Treasury. But that's not even the best part of the flight to banking. By becoming a bank and taking an emergency loan, an institution's anonymity is protected by the Federal Reserve. That's right, the Federal Reserve is refusing to disclose which banks have taken loans -- at press time more than $2.2 trillion worth -- because it might damage a bank's reputation. Note to the financial industry and the Fed: A lack of transparency directly contributed to the current crisis, and withholding the names of distressed banks does nothing to rebuild the industry's reputation.

Investors and everyone outside of the financial industry already think your reputations are worthless. Why? Because for years faux earnings reports indicated that banks were doing well; then, suddenly, banks started going belly-up faster than you can say "TARP" (Troubled Asset Relief Program). No wonder investors and taxpayers have little faith in our banking system right now -- it's guilt by association. Since no one knows who is accepting loans, everyone is viewed as financially unstable. The Fed's "reputation" rationale is counterintuitive.

A lack of confidence is what froze the credit markets in the first place -- no bank was sure if counterparties were financially stable. Only recently have the markets begun to thaw. In the meantime, the collapse of Lehman Brothers and the near bankruptcy of AIG have placed a spotlight directly on counterparty risk and collateral management, the subject of this month's cover story. But transparency still remains an issue, as Larry Tabb discusses in his column on the use of mark-to-model, rather than mark-to-market, valuations for hard-to-value assets.

The U.S. banking system once was a shining example to free-market economies everywhere. The longer it takes the Fed and banks to realize that the way to regain investors' trust is by becoming more -- not less -- transparent, the longer it will take to restore the industry's reputation.

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio
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