September 04, 2015
Sir, Gillian Tett writes: “If you want to see what can happen when a government tries to prop up stock and land prices, Tokyo’s story is sobering. It shows that not only do interventions carry a financial cost (since they rarely work for long), but that they can be a lasting drag on investor psychology.”, “China risks repeating the errors of Japan” September 4.
Well said, but let me use this same construct for what Ms. Tett seemingly finds too hard to understand: “If you want to see what can happen when regulators tries to prop up bank lending to what is perceived as safe, the story of the recent financial crisis is sobering. It shows that not only do interventions carry a financial cost (since they rarely work for long), but that they can be a lasting drag on investor psychology.”
Sir, in my quest of finding the words able to explain the huge regulatory mistake to you and your journalists, I today venture the following:
Bankers look at perceived credit risks, like for instance credit ratings. What regulators should therefore hope for, is that those credit risks are correctly perceived, and that the bankers know how to manage these.
Instead overly anxious regulators imposed risk-weighted capital requirements, which forces the bankers to wear corrective glasses that makes them perceive much safer the safe and much riskier the risky. And so now, even when credit perceptions are absolutely correct, these will still distort.