Clarity important for Europe stress tests
The U.S. government’s recent bank stress tests were all about clarity. With hard data and clear facts, they shone a bright light on the shadowy uncertainties of complex financial transactions.
The question now is: Will this sort of clarity be a part of doing business in the financial industry?
Bank regulators in the European Union should look at the U.S. example and make results of their upcoming stress tests of European banks transparent to the public.
Currently, they intend to inform only the EU finance ministers and executive agencies.
U.S. Treasury Secretary Timothy Geithner hit it on the head when he said last week, “There is a reassurance in clarity.”
I think many would agree that reassurance is vital to the return of confidence in the financial system.
The stress tests provided much more disclosure than is commonly shared by financial firms. It demonstrated that we need more information, more clarity, and more disclosure if we are going to know where we stand in this complex global economy.
I submit that this “reassurance in clarity” is exactly what we need to properly manage the enormous influx of money — larger than the Marshall Plan and New Deal combined — that is now being put into the system by way of stimulus packages, recovery programs and unconventional emergency measures.
This is taxpayer money. It involves the public trust. Talk of accountability and transparency must be backed by hard data and clear facts. There must be a clear window into how the money is spent and how it is strengthening the economy.
Businesses and governments must have the information tools in place to make that happen.
I believe that this kind of clarity is necessary not only for banks but for all businesses involved, in any way, with that huge river of government money. We are already seeing why this kind of greater clarity is essential.
Armies of lobbyists are doing whatever it takes to channel the money to their patrons. Government agencies are struggling to define their funding allocations and to identify exactly how the stimulus money will impact the economy. The U.S. inspector general overseeing the government’s bailout program says that he has already initiated “almost 20 criminal investigations into allegations of fraud.”
And there is uncertainty and consternation among the recipients of the stimulus money. They’re asking some tough questions about how they can manage the reporting workload, minimize risks, ensure compliance and demonstrate clear value to the public as well as shareholders.
The stimulus program cries out for greater clarity, and the time for government and business to get their act together is now. The first accountability deadlines for U.S. federal agencies to submit financial data are later this month.
The only way to successfully manage this unprecedented recovery effort is for government, regulators and corporations to institute smart and comprehensive systems for transparency, accountability and control. They must be fully aware of everything that is coming in and going out. They have to have the policies, people, processes and technologies that are necessary to generate and process the information they will need to successfully manage this river of money.
The focus has to be on clear outcomes — policy outcomes for governments, business outcomes for corporate recipients. The only way we can rebuild trust is to show proof of what is being done. That means there is no room for a lack of transparency. There can be no uncertainty. The recovery demands that we deliver outcomes consistently and repeatedly over time to reestablish trust in the free market system.
Complexity can be managed. We know how to do it. Think of a complex machine such as a car or a plane. Its dashboard or cockpit tells you how fast you are going, whether you have enough fuel, and if the engine is about to overheat.
The more clarity you have about the state of your car or plane, the better you can run it. In the future, every organization needs to have a dashboard or cockpit — an idea that may now sound obvious, but which would have prevented this great collapse if it had been widely adopted in the financial industry.
One of the conditions for banks to exit government programs should be dashboards that provide complete visibility into their risks and capitalization in real time. This would provide the kind of clarity financial institutions need to restore trust and confidence. As Secretary Geithner pointed out, this will pull more capital into the financial system, making it easier for banks to repay the governments.
This global recovery program involves the biggest public-private partnership in history. Major governments around the world will be channeling more than $2 trillion into this partnership.
Edmund Burke noted, “Those who don’t know history are destined to repeat it.” It is a lesson well worth considering as governments, corporations and taxpayers begin to deal with the immense programs that are intended to remedy our sick global economy.
The U.S. stress tests were a good start.
It is now up to governments and businesses around the world to follow this example to do everything humanly possible to achieve clarity.