A ‘light touch’ does not distort. Risk weighted capital requirements for banks was pure ‘heavy-handed dumb touch’

Sir, commenting on “Bank of England’s damning report on the 2008 failure of HBOS — seven years since the financial crisis” you write: “A [drawback] is that the regulators themselves — and the politicians who established the “light touch” regulatory regime for the City of London that encouraged the HBOS failure — do not face similar action… Meanwhile, the FSA, which was supposed to ensure that the UK’s biggest banks did not run aground and put the taxpayer at risk, was broadly deficient in its job. It operated within the prevailing political assumption of the time that the FSA “had to be ‘light touch’ in its approach and mindful of the UK’s competitive position”, “Better late then never for banking discipline”, November 20.

Twice you reference ‘light touch’. Wrong! A ‘light touch’ does not distort. The portfolio invariant credit risk weighted capital requirements for banks was pure and unabridged ‘heavy handed dumb hugely distortive touch!

I have explained it to you and your columnists and reporters a thousand of times, in hundreds of different ways, and so here comes a reprise of some of my arguments:

Bank capital is to be a buffer against unexpected losses. To base them on expected credit losses does not make any sense.

Any risk, like credit risk, even if perfectly perceived, causes the wrong actions if excessively considered.

All major bank crises have resulted from excessive exposures to assets perceived ex ante as safe, never from excessive exposures to what was perceived as risky.

To allow banks to hold less capital against some assets allow the banks to earn higher risk adjusted returns on equity on these. And that distorts the allocation of bank credit to the real economy.

To allow some banks to use their own risk models to determine the capital requirements is like allowing kids decide how much ice cream and chocolate to eat that leaves out the spinach and the broccoli.

Without these regulations banks would never ever have been allowed to leverage as much as they did.

To regulate banks without considering their purpose, like allocating bank credit efficiently to the real economy, is utterly irresponsible.

To allow some few credit rating agencies to have such importance for the capital banks needed to hold was to invite systemic risk.

Sir, it was clear that with this piece of regulations banks would dangerously overpopulate safe havens and, equally dangerous for the real economy, underexplore risky, but potentially very rewarding, bays. And that is what happened, and still you have difficulties of seeing it, I do not understand why. Is the difference between ex ante risks and ex post realities too much to handle?

Not understand the role of risk-taking in keeping the economy moving forward so as not to stall and fall, shows lack of vision and wisdom.

And you know I could go on and on.

You write: “By naming [some] who ran HBOS “without due regard to basic standards of banking” and recommending that several face possible bans from working in the industry, it clarifies responsibility.

I wish that would be valid for failed bank regulators too. Most of them have been promoted and are busy hiding or ignoring their own responsibilities.

@PerKurowski ©