Bank regulators don’t dare hold “morbidity and mortality reviews of bank crises”, less these would find them responsible

Sir, Timothy Geithner while lunching with Martin Wolf refers to “Complications: Notes from the life of a young surgeon” by Atul Gawande and states “It was a fascinating book, in part because [Gawande] described how in that profession they do things that in economics we don’t do that well. They have this thing called morbidity and mortality reviews each Friday where they go over mistakes”, “Stresses and messes” May 17. And Wolf agreed with that “central banks don’t like analyzing their past mistakes but should.”

Indeed, how could bank regulators allow banks to hold much less shareholder’s capital against those perceived as “safe”, than against those perceived as “risky”? Could they not understand that allowed banks to earn higher risk adjusted returns on “safe” assets than on “risky” assets; and that this would distort the allocation of bank credit, and doom the banks to end up holding too much “safe” assets and too little “risky” assets.

Because of course, as they all should know, it is when banks hold “too much” of a “safe” asset when an asset could turn into a very risky asset for the banks. Empirically this is something well proven. Never ever has a major bank crisis resulted from excessive exposures to what was perceived ex ante as “risky”, these have all, no exceptions, resulted from excessive exposures to what was ex ante, erroneously perceived as safe... like AAA-rated securities, Greece, etc.

And besides, holding “too little” of the “risky” assets, like loans to medium and small businesses, entrepreneurs and start ups, is very bad for that part of the real economy which thrives on risk-taking, and is therefore, in the medium term and long term, something also very risky for the banks.

So YES! Bank regulators should hold “morbidity and mortality reviews”... but they don’t dare since these would find them the responsible.

And, if they did, I am certain Geithner and Wolf would also have more productive luncheons discussing bank and financial crises.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.