A former president of the Federal Reserve Bank of New York, Bill Dudley, who is now a UBS director has an opinion column up at Bloomberg proposing that two varieties of regulatory actions against banks—"matters requiring immediate attention" and "4(m) agreements"—be publicly disclosed rather than kept secret. He writes, under the how-can-you-resist-clicking headline "If Only We Knew the Problem Facing America's Banks":
the added transparency would provide a powerful nudge to bank managers and directors: If their response wasn't credible, shareholders would flee and the share price would plummet.
Immediate disclosure, however, could unduly restrain supervisors: They might be hesitant to issue negative findings for fear of provoking deposit outflows or customer defections that would make things even worse. Hence, it would make sense to build in a short delay — say, six months. This would give bank management enough time to fix simpler deficiencies, and to develop plans to address more complex issues — and to begin implementation — before disclosure was required.
This is a good explanation of the tension that bank regulators aim to balance between incentives to promote responsible behavior by bank management (the "powerful nudge") and the goal of preventing panics and failures (the "fear of provoking deposit outflows or customer defections"). The more powerful the nudge, the greater the fear.
I am skeptical, though, that the six-month lag Dudley proposes would accomplish the end he seeks of achieving the right balance between the two goals. It might just kick the can down the road.
Why would depositors or customers believe the banks when they claim, "oh, this was a problem six months ago, but we've since fixed it"? There'd be a powerful nudge for both management and regulators to claim the problem has been fixed even if it hasn't been fixed. The more candid anyone is about a problem that hasn't been fully fixed, the more the delay would fail to address the concern about the "fear of provoking deposit outflows or customer defections."
For ordinary Americans (not bankers, bank regulators, or bank compliance lawyers), the fine points of bank regulation are not "matters requiring immediate attention" most of the time—until moments, such as the 2008 "Great Financial Crisis" or the March 2023 Silicon Valley Bank/Signature Bank episode, when the issue sure does demand immediate attention.
The deliberate creation of a fixed six-month lag between a regulatory action and a mandatory public disclosure might present a lot of temptations to trade in advance of the disclosure. That could help transmit some information about the health of the banks to the public via movements in the stock prices, but it also might erode some of the supposed benefits of the six-month delay.
One way to think of it is as a bank customer. If the government tells my bank it had better shape up fast, would I like to know that information immediately so I can switch to a different bank? Or would I like the government and the bank to keep the information quiet so that the bank doesn't collapse so quickly that I lose my chance to move my money? Deposit insurance has ameliorated these risks for a lot of customers, but there are costs to that, too.
