To engage in ‘bank bashing’ while leaving the regulators unaccountable for their own mistakes is dangerously wrong.

Sir, I refer to Doyne Farmer’s, Alissa Kleinnijenhuis’ and Thom Wetzer’s letter “Prudent policymaking is not ‘bank bashing’” in which they discuss stress testing of banks. December 9.

They conclude: “As long as a “clean bill of health” for the financial sector remains a mirage, resilience should be further improved and stress tests should be made more credible. This is not bank bashing, but prudent policymaking.”

Right so, the problem though is that current stress testing does not test whether the banks are performing adequately their vital function of allocating credit efficiently to the real economy. And from that perspective what is not on a bank’s balance sheet could be more important that what is on in order to give it a “clean bill of health”.

And the reason that part is not included in the stress test, is that it would show that the credit risk weighted capital requirements for banks utterly distort credit allocation, and regulators would not like that to be known.

@PerKurowski ©