Confusion not only still lurks, it’s getting bigger!

Sir, LEX in “Who knows what evil lurch” March 25, refers to Andrew Haldane, the Bank of England’s executive director for financial stability arguing “The shift form Basel I to Basel II bank capital standards increased the calculations behind tier one capital ratios from six to 200m” and that “this greater complexity failed to prevent an epochal credit crisis.”

Mr. Haldane, it not only failed to prevent the crisis, it caused it. The risk-weights based on perceived risk of default applied under the table to a market that already cleared for perceived risk of default over the table applying their risk premiums shook the Ground Zero of financial markets and created the mother of all confusions.

The premiums applied by the market in order to make the lending or investment alternative equivalent from a perceived risk of default point of view, were then made unequal when regulators ordered different capital requirements for the lending or investments based on the same perceived risk of default. This double counting translated into that the expected return for banks of doing operations with what is officially perceived as risk-free (sovereigns and triple-As) catapulted when compared to the expected returns from what was officially perceived as risky (small businesses and entrepreneurs). As a result our banks have drowned, or find themselves trampling desperately in triple-A waters and public debt.

And then some have the gall to call this massive regulatory failure, a market failure! And Basel III is not correcting for it, and in many ways making it worse. I have been arguing this for years but unfortunately I cannot find the words gentle enough to get through to the regulators… I hope FT and LEX will.