June 19, 2014

BoE, of course prudential bank regulations is not everything, especially when totally imprudent

Sir, Chris Giles writes “The Old Lady is right that prudential policy is not everything” June 19. Absolutely! And this is especially so when the prudential policy applied, is the wrong one.

Prudential bank regulations rule 1.

Whatever you do, beware of the dangers of distorting the allocation of bank credit in the real economy; precisely like what is being done now with the risk-weighted capital requirements for banks.

Prudential bank regulations rule 2.

Never forget that in the financial world what is perceived as “risky” is a thousand times less dangerous than whatever is perceived as “absolutely safe”; something which regulators have completely ignored with their current risk-weights in the risk-weighted capital requirements for banks.

If one gets ones prudential regulations right there is less need for monetary policies. If one does not get ones prudential regulations right, no monetary policy can make up for it… in fact it could make things much worse... adding to the distrust of the financial system the distrust in the currency.