Mark Carney, do not use shadow banks to hide the mistakes committed by the regulators of the banks in the sun!

Sir I refer to Mark Carney’s “The need to focus a light on shadow banking is nigh” June 15.

Carney writes “In the run-up to the crisis, opacity in shadow banking fed an increase in leverage and a reliance on short-term wholesale funding. Misaligned incentives in complex and opaque securitisation structures weakened lending standards…The goal is to replace a shadow banking system prone to excess and collapse with one that contributes to strong, sustainable balanced growth of the world economy… As the G20 completes work on the core of the financial system, reforms to shadow banking must, and will, progress. Now is the time to take shadow banking out of the shadows and to create sustainable market-based finance."

Mr. Carney what on earth had shadow banking to do with the crisis? The current crisis was set off by an incredible misalignment of incentives caused by adopting risk-weighted capital requirements, in conjunction with assigning a risk perception monopoly to some very few human fallible credit rating agencies.

Does Carney really believe that the problem with the AAA rated securities backed with lousily awarded mortgages, the bubble of the real estate sector in Spain, the excessive loans given to sovereigns like Greece, and similar which could be financed by banks against basically no shareholders’ capital had much to do with the shadow banking?

No way José!

The only way G20 can do something worthwhile in terms of reform, is to accept with much humility that the risk-weighted capital requirements not only distort the allocation of credit in the real economy but are also, from a medium term financial stability perspective, utter nonsensical... since major bank crises never occur from excessive exposures to what is ex ante perceived as risky.