Regulating today’s modern banking system — João Granja

MIT Sloan Assistant Professor João Granja

MIT Sloan Asst. Prof João Granja

Years after a devastating crisis that spread from the U.S. across Europe and Asia, policymakers all over the world are still trying to come up with strategies to make sure that a financial crisis of that magnitude never happens again. One essential element of this task is building back the trust of the public.

When the every day participants in the financial system—the depositors, holders of short-term commercial paper of banks, and other bank investors—feel confident in the banks, the financial system stabilizes. Business runs more smoothly. And growth improves.

In the U.S. our faith in banks is abysmally low. According to a Gallop poll conducted in June, Americans’ confidence in U.S. banks stands at 26%, up from the record low of 21% a year ago. The percentage of Americans saying they have “a great deal” or “quite a lot” of confidence in U.S. banks remains well below its pre-recession level of 41%, measured in June 2007. Meanwhile, across the pond, only 19% of Britons say that banks are well managed, according to the British Social Attitudes Report released in September.

Perhaps the simplest way to instill confidence in the public is transparency. That is: to compel banks to provide full and complete balance sheet information. They must disclose more detailed information to the public on their holdings of securities, government bonds, commercial real estate, and commercial paper; they must reveal their amounts of equity and capital; and they should be more forthcoming about outstanding loans and other liabilities. There should be no such thing as “off balance sheet” assets.

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