The tight lid on banks' confidential supervisory information serves no one

tashatuvango - stock.adobe.com

A group of Senate Republicans have a new bone to pick with the Federal Reserve: An allegation that the central bank — or, rather, someone who works at the central bank — appears to have leaked confidential supervisory information to a Bloomberg reporter regarding an uptick in supervisory actions after the failures of Silicon Valley Bank, Signature Bank and First Republic earlier this year.

The nature of their complaint, unfortunately, was not that the alleged Fed leaker had failed to leak to American Banker, the nation's oldest and noblest financial publication. Instead, the letter takes exception with the act of leaking confidential supervisory information, which the authors — led by Sens. Thom Tillis, R-N.C., and Bill Hagerty, R-Tenn. — described as a "serious matter." And if the information didn't come from banks, then it must have come from the Fed, they argue. 

"Unfortunately, this raises serious questions as to the policies and the procedures the FRB has in place to protect confidential supervisory information from inappropriate disclosure," the letter reads. "We do not wish to believe the alternative, that these disclosures were done deliberately in an effort to advance a particular policy agenda."

First off, I very much doubt that the authors of the letter sincerely do not wish to believe that someone at the Fed leaked this information — it would seem that they have already reached that conclusion. But it seems very plausible, and indeed far more likely, that the reporters acquired that information via other sources. People talk, and in the financial regulatory sphere there are more cooks in the kitchen than just banks and their supervisors. 

But more importantly, let's consider the nature of what was actually disclosed: The Fed is issuing more Matters Requiring Attention and Matters Requiring Immediate Attention (known as MRAs or MRIAs) to midsize regional banks after some of their peers spectacularly failed. It named some of those banks that have allegedly received an uptick in those supervisory directives, but it did not meaningfully disclose the nature of those directives or indicate whether any of them were serious. Instead it gave the reader a perspective from an industry lawyer that supervisors want corrective action fast, and that can be costly — perhaps an indication of which side of the negotiating table this "leaking" was coming from. 

That brings me to my point, which is that the amount of secrecy that we have become accustomed to in the world of bank regulation is ridiculous on its face and probably counterproductive in its effect. MRAs and MRIAs might sound scary, but banks get them all the time. They are the primary means by which bank supervisors elevate their concerns to a bank's board of directors, and they can be about anything that a supervisor might think is a cause for concern — capital or liquidity adequacy, concentration in one or a few asset classes, IT or cybersecurity concerns, whatever it may be.  

In other words, the fact of the very existence of an MRA is not evidence of a problem; it's evidence that someone somewhere thinks something might be a problem in the future. But even banks' CAMELS ratings — the top-line assessments of how banks are performing across a range of safety and soundness measures — is unknowable to the public. It's like if Major League Baseball didn't disclose any box scores of individual games and only announced who won the World Series after it was over. In that scenario, I suspect some enterprising sports writers would be able to glean some details about how the Yankees are doing from some of the hundreds of people who would have more insight than the general public.

Politics and policy

Senate Banking Republicans want answers from Fed on CSI leak

October 10, 2023 2:26 PM

Obviously banking carries higher stakes than baseball — the Yankees having a bad season is not the equivalent of a major bank failing. But the veil of secrecy has precisely the effect that these Senate Banking Committee members wish to avoid: It allows people privy to CSI to leak it selectively in order to further a particular policy agenda. I am of the perhaps unpopular opinion that people — and especially reporters and investors — are not dumb. Given a suitably robust amount of data about how banks are doing — particularly if that data is updated consistently — the market will be able to make more informed conclusions and decisions about who's in trouble and who isn't. As it is, we have to rely on rumors. 

Fortunately, the authors of that letter are uniquely situated to do something about that problem. Congress has time and again affirmed its commitment to stamping out the dissemination of CSI and enhancing penalties for violators — and in certain circumstances that is absolutely appropriate. Details about an imminent merger or potential losses or a strategy pivot could give some traders a competitive edge, and disseminating that information selectively or improperly should be against the rules. 

But the amount of information currently considered confidential and thus subject to those penalties is far greater than it needs to be to avoid those bad outcomes. And it robs the public of its ability to ask informed questions and interrogate potential problems before they become catastrophes — a prophylactic effect that was sorely missed earlier this spring.