February 17, 2016

The blindness of Financial Times (FT) to the most dangerous bank regulation blunder of all times is mindboggling

Sir I refer to your “Simplicity is the key to a resilient banking regime” February 17.

Therein you write about the need to “ensure that lenders have clear capacity, primarily in the form of equity capital, to absorb large losses if a crisis hits. Of course, this is a balancing act: regulators must weigh the benefits of more resilient banks against the higher costs of equity funding, which are likely to result in slightly higher borrowing costs in the real economy, constraining household and business borrowing.”

There it is, right in front of you. You accept that the level of bank equity carries costs, but yet you refuse to acknowledge that different levels of required equity for different borrowers, those which result from the risk weighted capital requirements, distorts the allocation of bank credit to the real economy. Why?

Also when you specifically mention that more bank capital would constrain “household and business borrowing.” you are ignoring that these “risky” borrowers are already much more constrained by the regulatory advantages awarded to other “safe” borrowers like sovereigns, the AAArisktocracy and housing finance.

You are absolutely correct in that “Setting the level of equity banks should hold is a judgment call” but, setting different levels of equity based on perceived risks already cleared for by banks, is a call that just shows a total lack of judgment.

And, to top it up, the current risk weighted capital requirements for banks only guarantee that when what ex ante has been perceived as very safe ex post turns out to be very risky, that banks will stand there very naked because of having especially little to cover themselves up with.

PS. Sir I don’t refer here to the discussion between John Vickers and Bank of England (Mark Carney), since for all practical purposes they are just as blind as you Sir.

@PerKurowski ©