January 16, 2013
Sir your “Regulators should take on kid gloves” January 16 ends with: “The world economy was broken by banks’ cavalier attitude to risk and rules. When authorities suspect outright wrongdoing, a final finding for or against guilty conduct must be sought. Anything less is an insult to the public’s intelligence on top of the injury inflicted on their livelihoods”.
No! The world economy was broken by the regulator’s foolishly believing that they could drive out risk from banking by setting up different capital requirements depending on the perceived risk of the asset,blithely ignoring that the perceived risks are already cleared for by the interest rates, the size of the exposures and other terms.
By favoring so much what is perceived as absolutely not risky they have our banks drowning in exposures to precisely what has always caused the big crises, namely the absolutely-not-risky-turned-very-risky, while at the same time they are making it much more difficult for those perceived as risky, many of whom could be our absolutely not risky of tomorrow, to access the bank credit they need today.
And what do you call capital requirements which allowed banks to leverage their equity 62.5 times to 1 when investing in securities that are blessed with an AA to AAA rating, or when lending to Greece? Is that not a truly “cavalier attitude to risk”?
And is not, as Basel II decrees, allowing banks to lend to their sovereign against zero capital while requiring them to hold 8 percent when lending to an unrated or not so good rated citizen, just an odious discrimination in favor of the State and against the citizen?
You at FT must be well aware of my seriously argued criticism of the Basel Committee’s regulatory paradigm, and you must also have noticed that my questions have not even been acknowledged and much less given answer from any regulator.
If I find current regulations to be utterly crazy and dangerous and therefore the authorities engaged in wrongdoings, is it not my civic duty to denounce that? Why should I as FT seems to do, keep silence and protect the bank regulators?
Does this mean that I condone the wrongdoing of bankers? Of course not! And you know that.