Enhancing financial stability: the role of transparency

Speech given by
Donald Kohn, Member of the Financial Policy Committee, Bank of England
London School of Economics
6 September 2011

I’m pleased to be here at the London School of Economics to present my first public speech in my role as external member of the Interim Financial Policy Committee. I can’t think of a better venue; the Financial Markets Group at the LSE has been in the forefront of thinking on financial stability, and I am greatly indebted to Charles Goodhart for all that he has patiently taught me about central banking and financial markets over the years at innumerable conferences and in many private conversations.

I am honoured to have the opportunity to serve on the FPC. In the wake of the financial crisis, I can think of no more important task than to bring a broad economic and financial perspective to the supervision and regulation of the financial system. An element of that perspective has always been applied to the oversight of the financial system, but at least in advanced economies it hadn’t been applied systematically and forcefully, bringing to bear a wide range of expertise and analysis. It is important that we succeed, and I am encouraged by our initial meetings, which were marked by probing questions, varied contributions from all participants, and very useful and fruitful dialogue between the microprudential supervisors and those of us coming to the task from the more macro side. Although, as I will point out, transparency was an important theme of these meetings, the views you are about to hear are my own, and not necessarily those of my colleagues.

However well we do our task, we need to recognize that the authorities can’t do it all. The stability of the financial system ultimately rests on the decisions of its private sector participants. To be sure, government regulations can and should help shape those decisions and provide a structure within which private participants are more likely to help to stabilize the system. But, in the end, it is those private decisions that will determine the allocation of capital, economic growth, and economic and financial stability.

Those decisions cannot contribute to financial stability if they are not well informed, and the subject of my talk tonight is the need for better transparency among financial institutions, markets, and instruments. The available information needs to be comprehensive and accurate, it needs to focus on the important risks and characteristics, it needs to enable comparisons across institutions and time to facilitate analysis, and it needs to be understandable enough that market participants can assess and act on its implications. We’ve made considerable progress over the past few years, but more can be done.

I’ll begin with some thoughts on the overall role of transparency in promoting financial stability. Next, I will make some suggestions for enhancements to transparency in various aspects of the UK financial system. Transparency has positive externalities, but it is not free, and we will need to consider the costs and benefits as we move forward.

Finally, I will outline how I believe transparency by the FPC itself can contribute to financial stability as well as to the accountability of the committee.

To read the entire speech, please click on the PDF file.