From individual transparency to systemic transparency.

November 19th, 2010

Source: Flavio Takemoto

A certain number of tools have been developed over the past two decades to enhance corporate or governmental transparency. Anticorruption prevention tools, integrity pacts, and good reporting or disclosure practices were adopted by a certain number of corporations, governments or public institutions, those being individual players in the global economy. Yet the 2008 crisis has shown that many individual commitments or right behaviors were not enough when a few uncontrolled players could put the entire system at considerable risk and threaten economic development for several years.

The current debate on the “too big to fail” institutions is a further illustration of the need to move from a microeconomic debate on individual practices to a macroeconomic debate on how to enhance the whole system. Those institutions, nicely renamed SIFIs (Systematically Important Financial Institutions), were identified at the onset of the crisis among the key drivers of the systemic risks. Two years later, we still have to wait one more year before we can obtain a list of those institutions from the Financial Stability Board. This is probably due to a shortage of political will, as the IMF—a less political body—has demonstrated that decisions on enhanced lending capabilities can be made quicker, but these hesitations are also a reflection on the systemic complexity of the transparency challenges. A certain number of banks are “too big to fail”, but non-banks which form what is called the “shadow banking system”, such as big investment funds, have come to exercise banking activities without having to comply with banking regulations. They have entered the potentially lucrative, but risky, business of maturity transformation—borrowing short term at low rates and investing long term at higher rates, therefore making profit out of a spread. This business sustains itself as long as short term borrowing can be renewed. If not, fire sales of assets or credit shrinkage, or both, create systemic risk. If shadow banks are not covered by any upcoming regulation, they will simply take business out of the more regulated banks. Contrary to what some large banks already argue, this is not reason to enforce regulations against nobody, it is a reason to regulate everybody.  Indeed, all institutions, everywhere, which are engaged in large scale maturity transformation, should be subject to higher capital requirements and better disclosure.

Flight from regulation will probably happen more and more in the coming years. If there has to be global governance, this governance should be less concerned with the regulation of individual players than with the regulation of the global system, so that no loopholes are left out of the regulatory efforts. Offshore centres, trusts, as well as weak states auctioning their sovereignty instruments (from mining licenses to flags of convenience) have to be addressed by the major powers. Those major powers have to act jointly and should also start by improving their own domestic efforts towards transparency and against corruption.  Finally, UNCAC has to be implemented, and it may also have to be amended to incorporate the new needs for global financial governance.

Written by François Valérian

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