March 14, 2009
Rethinking Financial Regulation: Simple Transparency, Open Source and XML
Even if you have open access to current public information, the warehouse with the Lost Ark of Indiana Jones is not simply transparent. We need open public policing of the financial system. Creating an empowered social network where the community of investors can help protect each other from being ripped off. Empowering a global financial neighborhood watch. Wired Magazine publishes a specific open regulation proposal.
The SEC's public document database, Edgar, now catalogs 200 gigabytes of filings each year—roughly 15 million pages of text—up from 35 gigabytes a decade ago.
But the volume of data obscures more than it reveals; financial reporting has become so transparent as to be invisible. Answering what should be simple questions—how secure is my cash account? How much of my bank's capital is tied up in risky debt obligations?—often seems to require a legal degree, as well as countless hours to dig through thousands of pages of documents. Undoubtedly, the warning signs of our current crisis—and the next, are online somewhere in all those filings, but good luck finding them.
1. We must require public companies and all financial firms to report more granular data online—and in real time, not just quarterly—uniformly tagged and exportable into any spreadsheet, database, widget, or Web page. The era of sunlight has to give way to the era of pixelization; only when we give everyone the tools to see each point of data will the picture become clear.
Banks have to issue Free Writing Prospectus (FWP) Every bank that issues mortgage-backed securities—pools of home loans packaged together and sold as a single entity—is required to file a free writing prospectus, which lists every individual mortgage in each pool. An FWP contains endless columns of pure data, most of which don't even track from page to page. And each FWP is different. It took five professionals three months to take FWP data and standardize it so that it could be comparable. The result of that work is private. It is only for the use of the company who hired thos professionals so that the hiring company has an edge.
2. Today, nearly 50 companies report their information in XBRL to the SEC. XBRL stands for eXtensible Business Reporting Language. It is a version of XML.
A few years ago, when banking regulators started requiring filings in XBRL from its member banks, it found that the time it took auditors to review a bank's quarterly financial information dropped from about 70 days to two. More regulators are catching on: Last December, the SEC announced that by June, every company with a market capitalization over $5 billion will be required to submit all filings using the format. And all publicly traded companies and mutual funds must follow suit by 2011.
Open Source Lending Enables Lower Default
Lending Club provides the data on its customers and posted the formula it uses to measure default risk and determine the interest rates its borrowers had to pay. After receiving a slew of suggestions, the site's engineers decided to modify the equation, assigning less weight to debt-to-income ratio, for instance. LendingClub's default rate is a staggeringly low 2.7 percent (versus nearly 5.5 percent for prime credit cards).
XBRL is a language for the electronic communication of business and financial data which is revolutionising business reporting around the world. It provides major benefits in the preparation, analysis and communication of business information. It offers cost savings, greater efficiency and improved accuracy and reliability to all those involved in supplying or using financial data.
XBRL stands for eXtensible Business Reporting Language. It is one of a family of "XML" languages which is becoming a standard means of communicating information between businesses and on the internet.