Europe's Stress Tests Must Be Transparent
Publicly disclosing results of the stress tests of the largest U.S. banks was an unprecedented exercise in transparency that has provided much-needed reassurance to the U.S. financial system. Since the results were made public last month, 16 of the 19 stress-tested U.S. banks have already raised more than $75 billion in capital in a clear vindication of U.S. Treasury Secretary Timothy Geithner's strategy of openness. In fact, the U.S. Treasury Dept.'s decision on June 9 to let 10 big banks start repaying billions of dollars in taxpayer aid was doubtlessly influenced by the insight generated by the stress tests. Bank regulators in Europe should heed this and follow the U.S. example. We need full public disclosure of the results of the upcoming stress tests of European banks. The current plan of only informing the finance ministers and executive agencies should be reconsidered because it may not provide the clarity that is vital to the return of confidence in the European financial system. Some argue the U.S. stress tests were imperfect—that the economic assumptions underlying them were too optimistic. This is beside the point. More than anything, the stress test results assured us the banks' books were being inspected from the outside and the Obama Administration was not about to nationalize the banks. Once the results provided this clarity for all to see, the markets reacted positively. What we are seeing in this global crisis is a growing and lasting need for clarity. Transparency and accountability have always been worthy ideals; now they are becoming mandatory requirements for doing business.
Rebuilding Confidence In April, I hosted some 40 CEOs and academics around the globe in Frankfurt at a small workshop. In speaking to them and listening to their concerns, it soon became very clear that the most important common goal was rebuilding trust and confidence in the world of business.
The public demand for clarity in the financial system is just the starting point. I believe transparency and accountability is necessary for all businesses in this new, post-Lehman Brothers era.
Consider the huge influx of money—larger than the New Deal and Marshall Plan combined—that is now being poured into the system by governments through stimulus packages and recovery programs. This is taxpayer money. It involves the public trust. There must be a clear view into how the money is spent and how it is strengthening the economy. We are already seeing armies of lobbyists trying to channel the money to their patrons. The U.S. inspector general overseeing the government's bailout program says he has already initiated "almost 20 criminal investigations into allegations of fraud."
The only way to manage this unprecedented recovery effort successfully is for politicians, regulators, and corporations to institute smart and comprehensive systems for tracking the spending and to control and prevent any abuse. They must be fully aware of every cent that is coming in and going out. 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.
A Roman Example We all know that when accountability is stressed, it has remarkable results. In the days of the Roman empire, whenever an engineer constructed an arch, he had to be accountable right there and then. The Roman way was this: As the capstone was hoisted into place, the engineer would have to stand under the arch. No wonder we still see some of those arches standing after two millennia.
I am a big believer in enshrining best practices, and I submit that the clarity associated with the U.S. bank stress tests is a best practice that should be followed by the Committee of European Banking Supervisors. Europe, like the U.S., should lead by example and not revert to an elitist approach that fails to restore confidence in the European banking system.
It reminds me of why we got into this mess in the first place. It wasn't that the banks weren't running risk models. Banks have always been at the forefront of risk management, using armies of PhDs in mathematics and cutting-edge technology to try to keep risk under control. Yet we can see that the experts failed. I believe the key reason was an absence of clarity and visibility. Banks did not have an integrated strategy-to-execution process that fully accounted for risk. Indeed, banks' legacy information systems were often disconnected—making it difficult to get timely and complete visibility on risk.
Thanks to that failure, we are now living with a new, starker reality. I am reminded of what Molière said: "It is not only what we do, but also what we do not do, for which we are accountable."
In the post-Lehman world, obfuscation will once again lead to dangerous consequences. On the other hand, a focus on clarity and accountability will help us rebuild trust in business.