October 09, 2012

And why are so distorting risk-averse risk-weights not even mentioned?

Sir, Patrick Jenkins gives his reasons for “Why the Liikanen bank regulatory reforms fall short” October 9. 

Of course those reforms fall short, but, what surprises me the most is that your bank editor does not even mention the fact that these reforms do not include eliminating the principal cause for the recent crisis, and the principle cause for why it is so hard to get our economies restarted. I refer of course to those risk-weights by which bank regulators (and bankers´ models) determine the effective capital requirements for banks, based on ex ante perceived risks. 

The Liikanen report writes a lot about these risk-weights needing to be more robust, but it does not mention the fact that these risk-weights, no matter how robust, distort the efficient resource allocation that banks are to carry out, by pushing the banks to lend excessively to the “not risky” and insufficiently to the “risky“. 

Could it be that Patrick Jenkins is unaware of these risk-weights or of how they work, or is he not allowed touching that issue that is seemingly so touchy to FT?