The proposal to increase transparency in the banking sector by making public the risk assessments of individual banks made by their regulator, the RBI, should be adopted straightaway. It will act as a check on dodgy banking practices and improve efficiency of credit markets. A major impediment to the move is the fear that such public disclosure of information might affect weaker banks, and may even cause a run on them by scared depositors. This, in fact, has been the argument the world over against enhanced disclosures?that ordinary people are too panicky to be trusted with data on the true health of a bank?and India would set a global precedent by going ahead with the move. Efforts to put such information in the public domain have been resisted even in the US, where a proposal by a Securities and Exchange Commission appointee to disclose individual bank ratings caused an uproar among banks as well as regulators.
India, we trust, is not given to losses of equanimity that would damage the banking sector. The RBI uses two supervisory rating models: Camels and Cacs. While the former acronym stands for ?capital adequacy, asset quality, management quality, earnings, liquidity and sensitiveness (to market risk)?, the latter stands for ?capital, asset quality, compliance and systems & control?. Based on crucial prudential parameters, these tools help the RBI assess a bank?s state of safety and identify points of stress. While the first is used to evaluate domestic banks, the latter is used for foreign banks. In the Camel model, banks get a score on each factor ranging from 5 (worst) to 1 (best), and any institution with an overall rating of less than 2 is considered a safe bank, while others are tagged at various levels for supervisory concern. However, so far, the secrecy of the ratings has prevented any worthwhile discussion on how the central bank measures risks, and how the models might be improved, especially with Basel-2 taking a new look at assorted risks. Does the system need an update? A recent study showed that a third of US banks that failed had received safe ratings two years before their closure. This raised the criticism that banking regulation has become an insider game, with even bank investors kept out of the loop. Surely, ?outsiders? can be trusted with more information.