October 31, 2013

With regulators like Mark Carney there is no future in finance for the City, or for the rest of the economy for that matter

Sir, John Gapper writes that Mark Carney, the new “Bank of England governor, has arrived from Canada with a dose of can-do spirit”, “Carney is wise to nurture the City´s future in finance” October 31.

“Can-do spirit”? Ha! There is nothing as far from a can-do spirit than capital requirements for banks which are higher for what is perceived as safe, than for what is perceived as risky. These not only guarantee that banks will not finance the future but mostly refinance the past, but also guarantee the kind of distortions that will make it impossible for the banks which are not in the shadows, to survive.

How can we have reached a point where we can write about “a knowledge industry that has been vital to growth and trade since the 19th century” blithely ignoring there is no way that 19th century banks could have done what they did, with current regulations.

Let me try to explain the regulatory lunacy again, in terms of knowledge. If banks know (or believe they know) the risks, and adjust for these in interest rates, size of exposures and other terms, what business have regulators adjusting for exactly the same “know” in the bank capital?

The role of a banker is to stop his bank from failing”, while the role of a regulator is to see how to stop bankers from failing to stop their banks from failing, and, if banks fail, to see that the hurt will be contained as much as possible. In other words: Though a banker might very well look at credit ratings, a regulator must not look at these, but at how bankers look at credit ratings. Why is it so hard for Mark Carney and his colleagues (and John Gapper and his colleagues) to understand that?

PS. From Edward Dolnick’s “The Forger’s Spell” I extract that the psychologist Leon Festinger once marveled: “A man with conviction is a hard man to change. Tell him you disagree and he turns away. Show him facts or figures and he questions your sources. Appeal to logic and he fails to see your point”. Does this apply to me, or to the bank regulators and Financial Times journalists, or to all of us?