Normally bank failures occur when macro-economic conditions have worsened, and asset values are falling. Bank failures during boom conditions, e.g. resulting from fraud, such as Barings, are easier to handle with less danger of contagion. In the uncertain conditions of generalized asset value declines, the new (incoming) accountants, employed by the resolution agency, are likely to take a bad scenario (or even a worst case) as their base case for identifying losses, to be borne by the bailedin creditors, partly also to minimize the above-mentioned danger of underestimation leading to further calls on creditors. Previously the accountants of the failing bank itself will have been encouraged (by management) to take a more positive view of its (going concern) value. Thus the transition to bail-in is likely to lead to a huge discontinuity, a massive drop, in published accounting valuations. This could put into question amongst the general public the existing valuations of other banks, and lead, possibly rapidly, to a contagious crisis, on which we add more below. Emilios Avgouleas and Charles A Goodhart (2014) A CRITICAL EVALUATION OF BAIL-IN AS A BANK RECAPITALISATION MECHANISM, p. 12.
Charles Goodhart is a former member member of the Bank of England's Monetary Policy Committee. The quoted passage occurs in a rather technical discussion about the costs and benefits of proposed (and now actualized) bank bail-in regimes in Europe and Stateside. Here I am going to ignore the merits of those regimes. (I tend to agree with Avouleas and Goodhart's concerns.) For the quoted passage amounts to the emperor's fashion advisor admitting the emperor is naked. The following fourth observations are not the main aim of the piece I am quoting from, they are just part of an argument. It's because the claims are causally made that they are so revealing.
First, the imagined context (based on recent experience) is a hypothetical crisis ("generalized asset value declines"). Such conditions are taken to be "uncertain." They, hereby, signal that we have moved from a world of risk (in which we have measurable probabilities), to a world of Knightian uncertainty (in which we have no grounds for assigning probabilities).
Second, Avgouleas and Goodhart accept a kind public choice analysis of the practice of accountants; accountants are not treated as fully independent professionals, but rather as folk whose activities are governed (in part) by their paymasters wishes (be that "management" or, after a failure, the "resolution agency"). Note that they do not even pretend that the accountants are serving the shareholders' interest; Avgouleas and Goodhart tacitly accept the principal-agent problem and do not really believe that accountants are ever truly independent.
Third, Avgouleas and Goodhart note that "published accounting valuations" are not robust. It's possible that they think that with more accounting integrity stable numbers are possible (this is just a case of epistemic uncertainty), but it is equally possible that they think that's just an illusion (metaphysical uncertainty). It does not seem to matter either way.
Fourth, the reason why they think it's problematic that "published accounting valuations" are not stable is not because, say, all risk models are, thereby, based on epistemic mirages, but, rather, what needs to be prevented is that "the general public" starts the doubt the integrity of published valuations. That is to say, the public needs to stay in the dark about the truth about these numbers (because if the public loses confidence we risk more extensive crises). If keeping the shoddiness of accounting secret from the public serves the public's genuine good, one may call this a a species of Platonic noble lies. But other terms also spring to mind.
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