March 04, 2010

Naïve regulators went to sleep like babies.

Sir in “Do not rush to switch off the life support” March 4Robert Skidelsky and Marcus Miller refer to “flaws in regulatory philosophy that stemmed from the belief that the banks could safely be left to regulate their own risks”. That is simply not true!

The fundamental flaw was that regulators replaced the hard-work that financial supervision ensues with a naïve belief in some capital requirements based on risk they concocted and in the capability of some credit rating agencies to adequately measure risks… and then went to sleep like babies.

Had they left the banks to their own design and not influenced them with absurd low capital requirement for what was perceived as having low risks of default... something else might have happened, but not this crisis.

What we need more than anything is to get rid of the current bunch of regulators who have entrenched themselves in the almighty and to no-one responsible Basel Committee and which’s has in the Financial Stability Board its first line of defence.