WASHINGTON - In a rare collaboration, federal regulators announced Thursday that they will work with financial executives to disclose more information about how banks and securities firms operate, including what risks they are taking.
"We shouldn't be afraid to disclose the risks on our balance sheet," Walter V. Shipley, former chairman of Chase Manhattan Corp., said in an interview. "If we're afraid to disclose them we are probably taking the wrong risks."
Mr. Shipley will chair the working group, which includes a dozen bankers and brokers as well as representatives from the Federal Reserve Board, the Securities and Exchange Commission, and the Office of the Comptroller of the Currency.
Both sides stand to gain.
Banking and securities regulators are looking for some help in supervising the nation's largest financial services firms, which are increasingly complex. Added disclosures are expected to increase market discipline on these firms.
If market pressure becomes a substitute for regulatory oversight, the private sector would benefit from less regulation. "The more we disclose the risks on our balance sheets and income statements the less need there will be for regulatory prescription," Mr. Shipley said.
Another incentive is higher stock valuations.
"Bank stock prices would be better off if the type and degree of bank risk were better known and quantified," said Credit Suisse First Boston analyst Michael L. Mayo.
The working group's roster includes the chief financial officers of Chase, Bank of America Corp., J.P. Morgan & Co., Wells Fargo Corp., Merrill Lynch & Co., Morgan Stanley Dean Witter, Bank One Corp., Citigroup Inc., and Goldman Sachs & Co. International banks represented are Deutsche Bank AG, HSBC Holdings PLC, and UBS AG.
Mr. Shipley said the group will produce a report in short order. "I'd like to see this thing completed in the fall so that the yearend disclosures and annual reports could incorporate some of the recommendations," he said.
Fed Governor Laurence H. Meyer called the public-private collaboration unique, and added, "It may serve as a precedent for other issues in the future."
In a call with reporters, Mr. Meyer described the working group's strategy.
"The first thing we want to do is to determine best practices and bring everyone in the industry up to that frontier," he said. "Then we want to look for ways in which those best practices might be improved."
Mr. Meyer said that the securities industry was included in the working group because financial modernization legislation has placed banks and brokerages in direct competition in many lines of business. "Banks would like to ensure that there is a level playing field," he said. "We thought that having securities firms involved might make banks willing to pursue this more aggressively than they might otherwise."
Mr. Meyer said new regulations may not be necessary if industry practices improve.
Columbia University professor Charles W. Calomiris, a vocal advocate of increased transparency, hailed the group's formation. "These banks are interested in market discipline now, because their capital levels are high," he said. "We had better seize this opportunity."
The move to add greater market discipline to the regulatory process has been gaining momentum for nearly a year.
Last June international regulators, working through the Basel Committee for Banking Supervision, focused on increased market discipline as one of three pillars underlying new capital rules.
In separate appearances last October, Fed Chairman Alan Greenspan and Vice Chairman Roger W. Ferguson Jr. both said that market discipline would play an increasingly important role in bank supervision.
In January Mr. Meyer fleshed out the central bank's thinking, saying banks should disclose more data on asset values, internal credit ratings, and the adequacy of loan loss reserves.
In a speech in Singapore last month, Federal Reserve Bank of New York President William J. McDonough, who heads the Basel Committee, weighed in. "There is little question about the urgency of achieving dramatic progress in this area," he said.
A recent Fed study expanded on Mr. Meyer's list of possible new disclosures, including banks' top-10 credit exposures, regulatory rankings such as Camels ratings, and daily trading results so investors could judge the accuracy of a bank's risk management models.