Every year bank supervisors collect a great deal of information on the safety and soundness of each bank. They analyze this information and summarize it with the well-known Camels rating.
The process is costly and time-consuming for the supervisors and more so for the banks.
Rather than duplicating this work, investors would like to see the rating. Since the decision to release the stress test results, some have called for the routine release of Camels reports, too ["Stress Tests Touch Off Debate on Disclosure," American Banker, April 30].
Disclosing the results was the right thing to do with the stress test; the goal was to instill confidence in the investors, creditors and counterparties of the banking system. In contrast, the goal of a typical bank exam is to protect taxpayers from the perverse incentives of deposit insurance. There is no systemic value to releasing an individual bank's Camels rating, except maybe in extreme circumstances.
Our concern is that mandatory or voluntary disclosure of Camels ratings would reduce the quality of information a supervisor receives from banks.
To conduct an exam, a supervisor needs good information from a bank — not just "hard" information, like the dollar value of loans, but also "soft" information, like the management team's own assessment. There is no way a supervisor can see everything that goes on in a bank. The supervisor is always dependent, to an extent, on the bank's cooperation.
Disclosing this information to the public would raise the cost to the bank of cooperating with the supervisor and lower the quality of information.
Imagine the sorts of candid conversations you have had with a co-worker. Now imagine how those conversations might be altered if you knew they would be transcribed and released to the rest of the company. It's a similar sort of situation when a bank supervisor sits down face-to-face with a bank officer. When the bank is doing well, this is probably not a concern. But when the bank is doing poorly, disclosure can lower the quality of the information a supervisor receives precisely when the supervisor needs it the most.
Still, why not let banks who want to disclose do so? As it turns out, allowing that would be the same as mandatory disclosure.
Imagine yourself as the CEO of a bank that is doing well. If you do not disclose the information, the market will lump you in with the other banks, including some not-so-good ones.
If you disclose the results of your report — and we are assuming you cannot issue a fake report — the market will know that you are one of the "good guys." Wouldn't you wave your good Camels rating around? Of course you would. We certainly would, and so would every other CEO of a good bank.
This leaves the weaker banks as the only ones not disclosing, but even then, the strongest of the weak would want to avoid being lumped in with the really weak, so they would disclose, too. In the end, everyone would disclose.
What does this mean for supervisory disclosure? If a supervisory agency does not want to disclose its report, then it had better stop all the banks from disclosing. And by force of law, this is what is currently done.
We are aware of the argument that disclosing Camels ratings might reduce regulatory forbearance. And, like many people, we think the S&L crisis of the 1980s was made worse by such forbearance. Still, it was no secret that many S&Ls were in trouble at the time, so it strikes us that forbearance indicates a lack of political will, rather than insufficient disclosure.
If we could wave a magic wand to conjure up a Camels rating, then by all means we should disclose it. But, in practice, information is expensive to collect and interpret, and a supervisor needs the cooperation of the bank. Public disclosure would increase the cost to the bank of cooperating, and this, we think, would lower the quality of information the supervisor gets.
In the world of financial regulation, disclosure is often viewed a bit like baseball, motherhood and apple pie — you can never have too much of it. But sometimes more is not always better.