May 22, 2015

If only our bank regulators in the Basel Committee / FSB grew up to wear long pants and assumed their responsibilities.

Sir, Gillian Tett holds that: “Credit derivatives deserve a revival — if financiers grow up” May 22. I agree… but that is far from being enough.

Though Ms. Tett rightly advices that these derivatives need to be a genuine tool in risk management, and not just a technique for regulatory arbitrage… she keeps mum on the fact that the only reason for which they are used to arbitrage, is the availability of regulations that can be too easily arbitraged, or are too tempting to arbitrage, like the current credit-risk-weighted capital (equity) requirements for banks.

In short for risk-management instrument to be useful you have to remove the distortions made possible and provided by regulations… and for that to occur it is even more important that regulators grow up. 

We can all wonder how immature regulators have to be to be looking at the risks of bank’s assets and not on how banks manage those assets… and we can all wonder how immature they have to be regulating banks without even defining their purpose... and we can all wonder how infantile they can be thinking themselves able to regulate with some formulas… that no one of them can explain.