February 20, 2013
Sir, Mr. Rod Price is correct in his assessment that “Models make for higher risk not lower” February 20,meaning of course, when wrongly or excessively applied.
Price writes “any model adopted by the regulator should really be making sure that all participants have completely different models, but in doing so, must accept that some of them won’t be very good and that it must not intervene to correct this”. Mr. Price adds “Regulators do not appear to understand this point, and thus do not know how to use models.”
Of course they do not how to use models, and, as I explained to you in a letter you published in January 2003, long before Basel II was approved, neither do they know how to use credit ratings.
Regulators should not use credit ratings unless they prohibit the banks to use credit ratings, because otherwise they are just leveraging the information contained in credit ratings too much, and condemning the banks to overdose on these.
Mr. Price’s letter contains arguments that I have been writing to you about for years now, and which you decided you preferred to ignore, probably because of such a little petty thing that you just did not like the messenger.
But so let me ask you again, should it not be of our concern that bank regulators do not know what the hell they are doing? Or do you perhaps believe that it is too important we keep full faith in them, no matter what? And, if so, why did you now publish Mr. Price’s letter.