Tomorrow and Saturday, the Finance ministers of the G20 nations will meet in South Korea. This morning's Wall Street Journal blog Real Time Economics has the highlights of a pre-meeting interview with Treasury Secretary Geithner -- Ten Takeaways From Geithner Before G20 Finance Ministers' Meeting. One of those ten takeaways is this:
Three areas where there needs to be a global consensus for reform: 1) transparency and disclosure in the financial system, 2) derivatives regulation, 3) capital, liquidity, leverage rules.I'm not going to comment on derivatives and capital issues. But the question of increased transparency and disclosure in the financial system has been of theme our Athena Alliance since the publication a number of years ago of our working paper Reporting Intangibles: A Hard Look at Improving Business Information in the US.
In that regard, if Secretary Geithner want to push the G20 for greater transparency, he should start with more disclosure of intangible assets. It is not necessary to take on the entire accounting profession and try to assign a book value to intangibles. Simply requiring more reporting of intangibles would be a major step forward. This could be in the form of the Eccles and Krzus proposal for "One Report." Even baby steps, such as the OECD recommendation for strengthening the patent marketplace through disclosure of patent licensing and sales information would help (see earlier posting on the problem with royalty data). Or it could be through beefing up the requirements for disclosure of information in the MD&A section of existing corporate financial reports - as recommended in Reporting Intangibles.
The Secretary could put his money where his mouth is and lead by example. First of all, he should convene the relevant regulatory agencies --such as SEC, Department of the Treasury, the Federal Reserve and even the Commerce Department--and establish an advisory committee to make recommendations on ways of providing investors with an improved method for assessing the impact intangibles have on the accuracy of a company's financial picture. This advisory committee could also review valuation methodologies and look at ways to support and encourage increased research on valuation standards. This should include a review of industry trade associations efforts to adopt guidelines for intellectual asset management and intangible disclosure appropriate to particular industry sectors.
Second, as part of its prudent bank supervision activities, the banking regulators need to understand the role intangible assets play in the financial system. The regulatory agencies can take steps to study and collect information on the role of intangibles in the financial system--and to underscore the risks of ignoring them. As they build knowledge in this area, Treasury, the Federal Reserve and other financial regulatory agencies should ask the financial institutions the following questions:
• To what extent are lending institutions employing intangible asset as collateral, either explicitly or implicitly?
• What provisions are there in bank reporting requirements for intangibles?
• Given that intangible assets can be wrapped up in the catch-all category of a blanket lien on all assets, how can lending institutions determine the value of intangible assets for the purposes of assessing collateral?
• If intangibles are used explicitly as collateral, what underwriting standards are used and what are the specific valuation standards and loan-to-value ratios?
Third, the Secretary should support the commissioning of a National Academies' study on intangibles. This was proposed at a June 2008 conference sponsored by the Bureau of Economic Analysis and the National Academies. A broad study of intangibles could include the following components:
• A survey of efforts in other countries to advance the understanding of intangibles and their role in corporate performance and economic growth, promote financial investments in intangible assets, and foster the utilization of intangibles.
• An inventory of federally owned intangible assets and an exploration of how to exploit them for economic growth.
• A list of policy recommendations to accelerate private investment in and management of the types of intangible assets most likely to contribute to growth.
Such steps would put the US at the forefront of the transparency question and set an example for the rest of the G20. And isn't that what international leadership is supposed to be about?
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