Culture might not be a matter for bank regulators, but common sense should be.

Sir, you write “Banks are ultimately private institutions and not adjuncts of the state. It is the job of the FCA both to ensure that they treat their customers fairly and also to preserve the integrity of the UK’s financial markets. It is not the regulator’s function to determine how they go about the day-to-day management of their businesses. The soundness of the country’s financial system ultimately depends on having a sensible framework of well enforced rules as well as institutions that are capitalised sufficiently to withstand inevitable periodic shocks.” “Culture is a matter for banks not regulators” January 13.

Indeed but what have the regulators done? Nothing less than giving the banks the incentives that allow these to earn much higher risk adjusted returns on equity when lending to those ex ante perceived or deemed as safe, like the AAArisktocracy or Infallible Sovereigns, than when lending to those ex ante perceived as risky, like SMEs and entrepreneurs.

And that they did by means of credit risk weighted capital (equity) requirements, more risk more capital – less risk less capital; which means banks can leverage more with assets perceived as “safe” than with assets perceived as “risky”. 

Basel II prescribed 1.6 percent in capital for what was AAA rated, and 12 percent for what was rated below BB-. The meaning of that is “be very scared of the risks you see, what’s below BB-, and very daring with those you don’t see, the AAAs”

And with that regulators guaranteed that when really bad things happen, like when an AAA rated assets turned out ex post to be very risky, banks would stand there with especially little capital to cover themselves up with.

And with that they regulators also guaranteed the weakening of the real economy, that economy for which risk taking is the oxygen that helps it to move forward so as not to stall and fall.

Frankly, in their current incarnations, we would all be better off if the Basel Committee, the Financial Stability Board, the FCA, and other similar meddling schemers simply did not exist.

Sir, and you should be ashamed of helping to cover up those bad regulations that are taking our economies down.