Risk weighted capital requirements for banks guarantee excessive exposures against little capital

Sir, I refer to Martin Wolf’s lunch conversation with Andrew Smithers, “I don’t have any faith in forecasts” March 1.

In it Wolf quotes Smither saying “There’s a chapter in the new book on what I think economics should be about, which is not forecasts. It’s about not taking the wrong risks. You don’t know what’s going to happen but you can avoid excessive risk-taking and this, unfortunately, has not been the policy of the Federal Reserve”… and I would have to add, and neither of the Basel Committee.

Bank regulators, with their risk-weighted capital requirements, which are not even based on forecasts but on current ex ante perceptions of risks, guarantee excessive risk taking, against very little capital, to what is perceived as absolutely safe.

I am not copying Martin Wolf with this as he has expressed not wanting to hear more from me about risk-based capital requirements… he knows it all, at least so he says, but, since the above is precisely what Wolf seems unable to understand… perhaps you should copy him.