Bank regulators are still acting dumb!

Sir, Tom Braithwaite, Brooke Masters and Jeremy Grant report on the current status of financial regulation in “A shield asunder” May 20.  When discussing bank capital and the calculation of the risk-weights used by the regulators for determining the effective capital requirements for banks, they give new evidence of that bank regulators have still not understood what they did wrong.

The risk-weights, as they are used, translate into higher capital requirements for what ex-ante is perceived as more risky and lower for what is perceived as less risky. And that is so dumb! The lesser the ex-ante perceived risk of default, the higher are the possibilities of a buildup of such an excessive exposure that, if ex-post the risk of default turns out to be higher, could detonate a dangerous systemic crisis. When are they going to get it into their thick skulls that what is perceived as risky poses no systemic risk?

What precisely caused the current crisis? The risk-weight for loans or investments in what had a triple-A rating was set at only 20%, and which meant that when some triple-A ratings turned out to be unjustified, the banks stood there naked with no capital.

PS. For how long is FT going to avoid this extremely serious problem, only because someone might not like the tone of a Kurowski?