A bank regulator should not act like a banker, but think about how bankers act.

Sir, Sushil Wadhani and Michael Dicks remind us of Keynes´ teachings in that when picking winners of a beauty contest “rather than pick whom one believes to be the most beautiful person, it is best to pick those whom others might judge so”, “Investors must gauge perceived – ‘not true’ – chances of disasters” July 27. 

We sure wish bank regulators had headed that advice. Their capital requirements for banks were set based on ex-ante perceived risk, like credit ratings, and thinking of it almost as true risk. Basel II required for instance 1.6 percent when lending to a triple-A rated client and 8 percent, five times more, when lending to a small unrated business. 

Had the regulators instead set these requirements based on how the bankers would judge and act on the perceptions of risk, and had they also read about Mark Twain’s banker, he who lends you the umbrella when the sun shines and takes it away when it looks like it is going to rain, then they would have set the capital requirements for lending to the AAAs higher than when lending to a small unrated business, and this crisis would not have happened.