Monday, January 16, 2012

Vikram Pandit's Very Dangerous Idea

Cnbc writes: Vikram Pandit has a proposal aimed at shining a light into the black boxes that are the balance sheets of our biggest financial institutions.

Writing in Wednesday’s Financial Times, Vikram Pandit says that banks should be required to explain how they would measure risk in a standard portfolio created by regulators. The idea is to allow investors to “compare apples with apples”.


According to coverage in the Financial Times: It is not enough to require financial institutions to disclose capital ratios. Without knowing what that institution’s underlying assets are (only insiders and select regulators know that), outsiders, including most investors, cannot properly assess how that institution calibrates risk.

What is needed is a way to compare apples with apples. Regulators should create a “benchmark” portfolio and require all financial institutions, not just banks, to measure risk against that. The benchmark portfolio would not actually exist on the balance sheet of any one institution. Rather, it would be a collection of real investments that stand in for the kinds of assets that most financial institutions actually hold at the time. What is more, its contents would be 100 per cent public….
http://www.cnbc.com/id/45961370

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