• Treasury Commitee head calls for ‘presumption of disclosure’
  • Aim is to enhance market discipline investors exert on banks

The Bank of England should make public the information investors need to assess bank risk or explain why they’re keeping it secret, the head of the U.K. Parliament’s Treasury Committee said.

While confidentiality may be justified in some cases, “it is now in the public interest that a full justification for it be spelt out in detail by regulators,” Andrew Tyrie, a Conservative lawmaker, said on Tuesday. “What may be needed is a presumption of disclosure, supported by clarity and detail about the necessary exemptions.”

In a June 6 letter to Andrew Bailey, head of the BOE’s Prudential Regulation Authority, Tyrie wrote that the case for greater disclosure had increased as regulators implement bank-failure rules intended to bolster market discipline by putting creditors on the hook when a lender collapses.

The importance of ensuring investors, particularly bondholders, have as much information as possible was underlined by market turmoil in the first quarter. This was sparked by speculation that some banks risked triggering automatic suspension of discretionary payments, including of coupons on some of their bonds, because losses were close to pushing capital below regulatory thresholds.

‘Market Discipline’

“The level of market discipline imposed by shareholders prior to the crisis was found to be deficient,” Tyrie wrote in the letter, which was released on Tuesday. “It is to be hoped that after the development of bail-in debt, bondholders will do better,” he wrote, referring to the practice if imposing losses on creditors of a bank in resolution to avoid a public bailout.

Tyrie noted that shareholders, creditors and depositors lack access to the information that supervisors acquire, and are unaware of the instructions and advice supervisors issue to individual banks. That makes it more likely investors will make bad decisions and misprice risks, he wrote.

“If more supervisory information were to be made public, the market mechanism for imposing good behavior on banks might work better, possibly much better,” Tyrie wrote. “The danger is that regulatory convenience allies with the commercial advantages of non-disclosure, to the dis-benefit of investors, consumers and taxpayers.”

Tyrie also expressed concern about the feasibility of bail-in, the tool at the heart of regulators’ efforts to allow banks to be restructured and recapitalized without disrupting financial stability. Recent events in Italy and Portugal “show that the implementation of bail-in is extremely difficult in practice,” he wrote.

Tyrie’s comment echoes concerns voiced in April by Bank of Italy Governor Ignazio Visco. “It doesn’t look good to say that we have bail-in in place when everyone knows that it can’t be used because of these systemic and contagion risks,” Visco said.

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