Federal Reserve Board Governor Roger W. Ferguson Jr. said Thursday that banks should disclose more details of their risk- management practices, including data from models that measure trading and credit risk.
"Full information is a fundamental requirement of free and competitive markets," Mr. Ferguson said in a speech prepared for delivery at New York University.
He said investors rely too heavily on regulatory capital ratios, which are only "crude" indicators of a bank's risk profile.
Mr. Ferguson also said the 1988 Basel Accord on risk-based capital is outdated and must be replaced, because it requires the same amount of capital for all commercial loans. "A loan to a very risky junk bond company gets the same weight as a loan to an AAA-rated firm," he said.
Efforts by the Basel Committee for Banking Supervision to make the capital accords more risk-sensitive are under way and are expected to bear fruit shortly, he said.
The first reform proposal will probably be "modest and relatively noncontroversial," but more radical reforms will be introduced over time, he said. One expected refinement would expand the current four risk categories to better distinguish risky assets from safe ones.
Mr. Ferguson reiterated his support of a requirement that banks issue a limited amount of subordinated debt, the market price of which would reflect the institution's health.
"Such signals could act as a deterrent to a bank's tendency to take excessive risk and could perhaps alert bank supervisors to ... intervene in a bank more quickly," he said.