August 13, 2013

What is perceived as “absolutely safe” is the prime source of the unexpected which can cause bank crises

Sir, Roger Altman, referencing the “epic credit collapse of 2008 and the eurozone sovereign and debt banking crisis that began in 2010” writes “the message of history is the repetition of such crises and how the next one can occur at any time and from an unexpected source”, “Why the Fed needs Summer’s firefighting skills”, August 13.

And it is that part of “from an unexpected source”, which is precisely one of the most important things the next Fed chair needs to understand, in order to help correct totally dysfunctional bank regulations.

Currently the capital requirements for banks are much lower for what is perceived as “absolutely safe” than for what is perceived as “risky”. And these do not only distort the allocation of bank credit in the real economy, by discriminating in favor of The Infallible and against The Risky, but are also perfectly useless when it comes to increasing the safety of the banking system.

I have been trying for a decade now to get regulators to justify these capital requirements that I find to be dangerous and loony, but all the responses I get are in terms of “more-risk more capital less-risk less capital… does that not sound logical?

I am sorry, it is not enough to sound logical for us to bet our future on it, it has to be logical.