Toward Transparency: New Approaches and Their Application to Financial Markets

The Asian financial crisis in the late 1990s not only highlightedthe welfare consequences of transparency in the financial sectorbut also linked this relatively narrow problem to the broadercontext of transparency in governance. It has been observedthat objections to transparency, often on flimsy pretexts, arecommon even in industrialized countries. This article arguesthat transparency is indispensable to the financial sector anddescribes its desirable characteristics: access, timeliness,relevance, and quality. The authors emphasize the need to weighthe costs and benefits of a more transparent regulatory policy,and they explore the connection between information imperfections,macroeconomic policy, and questions of risk. The article arguesfor developing institutional infrastructure, standards, andaccounting practices that promote transparency, implementingincentives for disclosure and establishing regulations to minimizethe perverse incentives generated by safety net arrangements,such as deposit insurance. Because institutional developmentis gradual, the authors contend that relatively simple regulations,such as limits on credit expansion, may be the most reasonableoption for developing countries. They show that transparencyhas absolute limits because of the lack of adequate enforcementand argue that adequate enforcement may be predicated on broaderreforms in the public sector.