August 06, 2007

And be careful with the regulator risk

Sir in your editorial “The dangers of bailing out banks” August 6, you timely remind that “if bailouts are the norm, an entire banking system may take on inefficiently high levels of risk” and illustrating clearly the case for this warning by stating that in the case of IKB Deutsche Industriebank “there was always an implicit promise of support from KfW – credit rating agencies such as Fitch counted on it”

At this moment of time after so many years without any major bank crisis around the world and when the Bank Regulators have spend a couple of years in a self congratulatory mode may I also warn against the possibility, no matter how remote, that some very expensive bailouts could be undertaken also in order to save the regulator’s reputation. I mean if you appointed a couple of Credit Rating Agencies and then went to sleep on the job, you could foreseeable have a vested interest in hiding some facts.