The article Should Banks Disclose Information about Their Banks by Edward Simpson Prescott discusses on the effects of supervisors disclosing information about the bank to the market. The article disagrees with the argument that the supervisor should easily disclose information about their bank so that the investors can easily access and analyse and therefore avoid duplication of information. However expensive the collection of information is, the article does not support the disclosure of information by banks. The article rather discusses that releasing information about the bank gives room for anyone to use the information. This paper will review the article, citing the strengths and weaknesses of the article. It will further give options on how the article can be improved.
The author of the article argues that the supervisor of a bank should not disclose any information about the bank because the federal law regulation does not allow banks to release any information after conducting supervisory exams. Prescott in his argument shows that allowing the bank to disclose any information about it is similar to the supervisor releasing information about the bank. He bases his argument on the increase in costs of collection of information and suggests that if the supervisor is to allow the bank to release information, then the supervisor should allocate more resources for collection of information.
This argument is shallow considering that the author only backs up his idea based on the federal regulatory policy that prohibits banks from sharing information. In his analysis, he only looks at the costs of collecting information going higher when the supervisor allows for sharing of information. It is important to share information about the banks because: sharing give room for the checking of discretion. This is only possible when there is openness in sharing of information about the banks. The regulations only protect the federal banking regulators from being accountable publicly. This is general limits transparency and accountability.
In the research of the author, it is notable that only one variable has been put into consideration. The single variable has been used to summarize all other variables. This in itself does not prove how accurate the information is as the supervisor should get actual error by getting the difference between reported value and true value. The contribution of the article is thereby noted as making the banks supervisors to care so much about the risks the bank may face other than the amount of profits that the bank receives. The author, in his model, uses only incentives that the bank receives while sharing information. This omits the incentives that the supervisor would receive in the event that it gathers information about the markets. This is a clear indication that the results of the researcher was so shallow that he did not look at the effects on the model when other factors are considered.
The article has strengths and weaknesses. The strengths include: the article proves that there is no value to the market or to the bank from the supervisory disclosure. This is because the risk attached is neutral. Since the article proves that the supervisory disclosure increases the cost of collecting information, it is therefore important to note that there is no need for supervisors to disclose information if there is no value that the bank and markets receive from the disclosure of information by supervisors.
However, the weakness of the article is that the author does not see the importance of external auditors. In the article, the author says that the cost of audit would be unassailable if the auditing was costless because the supervisor would get the shock at no cost and would share the information with the market without hurting his ability to gather the information. This statement may discourage many bankers from attaining knowledge from other people or even noting some of the issues that can assist the supervisor to perform his duty in maintenance effectively. The mind of a supervisor would therefore remain closed. Another weakness is that the author of the article bases his argument of the need for supervisors not to share information on costs that would be incurred. He does not consider the other variables of production. Furthermore, the author does not consider the benefits that a bank would receive when the supervisor allows for the sharing of information.
In order to improve the paper, the author can consider other variables of production not only cost in order to determine if sharing of information would also affect them. The author should also consider talking of the benefits of sharing of banks information to the market and compare with the disadvantages of sharing the information in order to come up with a conclusion. For instance, when the bank shares its information, the market would be able to give records of profits received after every month, or six months or annually. The incentive of the supervisor should also be touched on. For instance, when the information is shared to the market, the market will easily prompt the supervisor to pay loans and other liabilities. Finally the author should acknowledge that they should also receive information from the markets. The information received from the markets will help in determining market prices as well as ratings of incentives. This therefore will diffuse the idea that sharing of information would be costly as the supervisors will see that they also gain when they share information.