March 30, 2015

There’s much more bank regulatory stupidity than what we should tolerate

Sir, Laura Noonan writes “The avalanche of post-crisis banking regulation is coming to an end and most of the uncertainties weighing on the financial industry will be dealt with in the next year, Basel Committee secretary-general William Coen has said”, “End in sight for post-crisis bank reform” March 30,

And she quotes Coen with: “There is light at the end of the tunnel, the big pieces are there and it’s really now about getting to the finish line”

Sorry, as I see it, they have not really started, there’s much more bank regulatory stupidity than what we should tolerate. For example:

Regulators should have no concern with individual banks failing, but with the banking system itself failing. In fact they should know that the failure of individual banks is needed in order to help to strengthening the bank system at large.

Regulators should foremost be concerned with how banks perceive credit risks, and with how they manage these. But they do also concern themselves with the perceived credit risks in order to set the equity requirements. Doubling down on the same basic perceptions can help no one.

Regulators should know the banks play an essential role in allocating credit to the real economy, and that they need to be extremely careful in not distorting that process. And yet they allow banks to leverage their equity, and the implicit support these receive from taxpayers, differently depending on perceived credit risks, something that of course distorts.

Most of us ordinary citizens are extremely risk-adverse. And that is why we as taxpayers agree to give support to banks so that they, on our behalf, take some of the risks we know the economy needs to go forward. So why on earth do regulators believe we taxpayers support the banks for these to be only safe mattresses in which to stash away our savings?

By the way, besides stupidity, there is immorality. To discriminate against the fair access to bank credit of the “risky” those who by being perceived as risky are already discriminated against by bankers, kills opportunities and promotes inequality.

Perhaps the Basel Committee is so blinded by its own mistake so that there’s no other way than to start from scratch… beginning with holding bank regulators accountable for their stupidity and immorality.