September 10, 2013

“A plan to finish fixing the global financial system”, or will it just finish it off?

Sir, in “A plan to finish fixing the global financial system” September 10, if his then quite an arrogant title, Mark Carney, the governor of the Bank of England and the current chairman of the Financial Stability Board writes “supervisors need to make good the pledge to G20 leaders… to tackle large differences in risk weights across banks”. I would ask him the following.

Why do you not tackle the supervisors’ own criteria of allowing large differences in risk weights to determine the effective capital requirement for banks?

Do you not understand that allowing for much much lower capital requirements on exposures to the “Infallible Sovereign”, to houses, or to the AAAristocracy, than for “The Risky”, like the medium and small businesses, entrepreneurs and start-upscauses the banks to be able to earn much much higher risk adjusted returns on equity when lending to the former than when lending to the latter.

Do you not understand that causes serious misallocations of bank credit in the real economy, and is by itself a source of immense systemic risk for the banking system?

Now if Mr. Carney would not understand what I am talking about, then I guess I would humbly have to recommend him taking a Finance 101 refreshment.

Carney also states “The G20s aim is to turn shadow banking from a source of risk to a source of resilience”. If that is going to happen by the Basel Committee and the Financial Stability Board, with excessive hubris continuing to believing themselves to be the risk managers of the world, and thereby distorting the global financial system… then, God help us! That would only finish it off.