August 02, 2015

Titanic went down because an excessive trust in its safety blinded it to unexpected events. Same with banks.

Sir, Randall Kroszner writes: “After the 2008-2009 financial crisis, the Group of 20 leading nations, Financial Stability Board, the Basel Committee and other international regulatory bodies convened to provide a co-ordinated global response, promoting rules to reduce banks’ risk exposure and to increase macroprudential monitoring. “Beware of a Titanic response to Dodd-Frank” July 31.

Yes but “promoting rules to reduce banks’ risk exposure” is just a crazy double-down-on-the-same-mistake response, when considering that the crisis was precisely the result of rules intended to reduce bank’s risks.

With their credit risk weighted capital requirements, more risk more capital and less risk less capital, what the regulators achieved was to guarantee the excessive build up of bank exposures to what was perceived as safe, holding very little capital… precisely the stuff major crises are made of.

And precisely, like extra lifeboats could make ships riskier, just requiring banks to hold more capital, without eliminating the distortions produced by the risk-weighting, will make all so much worse. You can already see how the “safe” havens are becoming each day more dangerously overpopulated, while the risky but so much more productive bays, where SMEs and entrepreneurs reside, are becoming equally dangerously, less and less visited by bank credit. 

Why do those who most fight against government spending austerity, usually include those who most want to promote bank credit austerity?