January 20, 2016

Could bank regulators, like Mark Carney, have accepted responsibilities for something they are not really qualified for?

Sir, you write: “Mr Carney acknowledges the concern that keeping interest rates very low for a long time may fuel a sharp rise in risky lending. It does not take a genius to see this, he adds, showing some frustration at the chorus of commentators warning of a credit bubble.” “Carney is right to keep UK interest rates on hold” January 20.

But, forget the interest rate for a second. Carney also wears the hat of the Chair of the Financial Stability Board. And, does it take a genius to understand that allowing banks to earn the highest risk adjusted returns where they most want to earn it, where it is perceived as very safe, will create, sooner or later, a bank credit bubble?

Here below is a question that we do not know how Mark Carney would answer it, because seemingly it looks that no one dares to make it… at least not FT.


The Basel Committee decided that in order to make banks safe, these need to hold more capital (equity) against assets perceived as safe from a credit risk point of view than against assets perceived as risky. 

For instance in Basel II a private sector asset rated ‘prime’ AAA carried a 20 percent risk weight while an asset rated ‘highly speculative’ below BB- had a 150 percent risk weight. That meant banks needed to hold 7.5 times more capital against a below BB- rated asset than against an AAA rated asset.

Allowing banks to leverage their equity differently based on credit risks obviously distorts the allocation of bank credit to the real economy, something that by itself could also be very dangerous for the safety of banks.

And the only way those risk weighted capital requirements for banks could be justified, would be if they really made banks safer.

And so the question:

Mark Carney, Sir, would you be so kind so as to provide us with one example of a major bank crisis that has resulted from excessive bank exposures to assets that were perceived as risky when placed on the balance sheet of banks.

I mean we can think of many instances were bankers were lulled into a false sense of security by good credit ratings, but I cannot for my life imagine bankers building up excessive exposures to something rated below BB-. Can you?

Sir, if Carney is not able to answer that very straightforward question adequately, it might indicate he has accepted a responsibility he is not fully up to and that should be worrisome… wouldn’t it?

Could it not be this bank regulatory distortion that impedes low interest rates and other stimulus to reach where it is most needed, like to SMEs and entrepreneurs?

@PerKurowski ©