Reform banking by putting capitalism back at the heart of capitalism

In a Guardian column, Stuart Fraser calls for more transparency.

Trust is the crucial building block underpinning success in any financial centre...

In our financial markets, trust is based on disclosure.  The markets are designed with the idea of Trust, but Verify.

In an internationally competitive industry such as banking, clients take their business to financial institutions that they believe are most worthy of their trust. That trust is fundamental to the way the global economy operates given that most transactions today do not involve the exchange of hard currency – notes or coins – at all, but the phenomenally rapid exchange of numbers over the internet and spreadsheets.

The historical reason for the success of Wall Street is that the US capital markets were reputed to have the best disclosure.

This makes the recent revelations about Libor manipulation all the more damaging to the international reputation of the City of London. It is one thing when one bank is involved in a scandal such as this, but it is a problem of an altogether different magnitude when investigations are taking place into the conduct of around 20 banks. It is important to note, however, that those under suspicion are not just British banks: institutions from the US, Canada and other jurisdictions are also being investigated by regulators worldwide.....

The Libor Scandal is just the latest example of opacity and the bad behavior that it conceals in the financial system.

Regular readers know that banks and structured finance securities are also opaque and as a result have been a magnet for bad behavior.

A successful financial services sector drives jobs and growth for all parts of the country – contributing £63bn in annual tax revenues in the tax year to March 2011. 

That is not an excuse for bad behaviour – far from it. Indeed, if anything it makes weeding out those parts that fail to meet the required standard all the more important. Only then can we rebuild public trust by changing the culture within those organisations found to have been involved in impropriety. 

That means putting capitalism back at the heart of capitalism: more transparency...

In fact, it means bringing transparency to all the opaque corners of the financial system.  Doing so allows sunlight to act like the best disinfectant of bad behavior.

The financial center that fully embraces transparency first will be the financial center that emerges with the leading market share going forward.

Is the City up to the challenge of adopting ultra transparency for its banks, requiring observable event based reporting for structured finance securities and basing Libor off of actual trades?

If not, all the money the UK government pumps into the City through bailouts, zero interest rate policies, quantitative easing and similar programs will not save the City from decline in the face of any financial center that does embrace transparency.