July 01, 2014

Regulators painted the banks into the dangerous corner of holding much of what is perceived as safe against little capital.

Sir, Alberto Gallo notes “The irony is that the Fed is becoming trapped by its own policies. QE and low rates have helped to solve the banking crisis, but also pushed investors to take on bigger risks” “Fed has grown complacent on credit market risk” July 1.

Yes but what has trapped them even more than so is that while providing liquidity and low rates because portfolio invariant risk weights, they forced banks into ever larger and dangerous exposures to what is, for the times being, officially perceived as “absolutely safe”.

Look for instance at the UK where even though BoE expresses concern of a housing bubble, it still permit banks to hold much less capital against mortgages than for instance against loans to SMEs.

The real problem we face today is that it is impossible for regulators to help banks out of the dangerous corners they have been painted, while they refuse to admit the possibility that it was they who did most of that painting.