February 01, 2011

For markets to work the regulator needs to act as a regulator and not as a risk-manager

Sir, “Time finally to make banks safe” you correctly write on February 1, yet you fail to understand that for market discipline to be restored, it is imperative that regulators keep their hands out of the markets, instead of, with their capital requirements for banks based on perceived risk of default and as risk-weighted by the regulator, acting with incredible hubris as the self appointed risk-manager of the world.

In other words you can order whatever basic capital requirement you want for banks… 9 percent or 100 percent… but that will not mean anything if you then water down some of these capital requirements by applying minuscule risk-weights. In fact the higher the basic capital requirements for banks are, the higher will the distortions produced by different risk-weights be.

The regulators set “Ground Zero” for most of the risk management of banks… and we need that “Ground Zero” not to be a distorted reflection of their arbitrary and regressive regulatory risk-adverse bias.

Ps. Truly I do not understand what little Per Kurowski might have done to FT, for FT to decide they prefer to shut him up, before having his opinions heard.