Without understanding the regulatory arbitrage one cannot get the real measure of the banks

Sir John Gapper in “Volcker has the measure of the banks”, January 28, quotes Viral Acharya, a professor at New York University’s Stern School, saying that “the crisis was caused by a ‘general underpricing of risk’ that led many banks into taking on more trading and investment risk to boost their returns”.

“Underpricing of risk”... by the banks? No! Who really underpriced risk were the regulators when they allowed the banks to hold less capital when “holding triple-A mortgage-related derivatives”, and which thereby artificially increased the returns of these assets. In other words the banks were receiving what they perceived as good returns only because of regulatory arbitrage.

I am truly amazed how, now soon two years into the crisis, some experts can still not see what some of us knew was going to happen, before the crisis happened. Without understanding the role regulatory arbitrage had in the crisis, forget about Volcker, Acharya, Gapper or anyone else getting a grip on any real measure of the banks.