Were bank regulators sufficiently vetted, or did those who appointed them simply not understand what banks are for?

Sir, Laura Noonan writes: “Here lies the big bank that once loaned billions to local businesses, but is now unwilling and unable to support the economy. Fondly remembered by its risk-adverse managers and overzealous regulators, its passing is deeply regretted by local business owners. Rest in peace… Surveys from the Bank of England chart an almost uniform contraction of lending to UK businesses from banks and building societies in recent years”, “Challenger banks move to stand out from the crowd” February 9.

Was it really a case of “overzealous regulators”? No! It was a case of dumb regulators who allowed banks, depending on how the risk of an asset was perceived or deemed to be, to have different levels of capital (equity); and who thought that would not distort the allocation of bank credit to the real economy. Or, worse, did not care one iota about if that happened.

How many of you in FT have read Basel Committee’s 29 Core Principles for effective banking supervision? To read these, and to think about their implied regulatory arrogance, should cause anyone to ask whether someone has properly vetted these bank regulators, before they were assigned with the responsibility of writing the rules for all of our banks… or did not vet them because they did not want to admit they did not understand what was being argued?

We have recently read about the extraordinary self-created reputational extravagances of a Paolo Macchiarini, and how some uncritical acceptance of these is even questioning the committee of the Karolinska Institute of Sweden that selects the Nobel Prize for medicine.

After so many years, and so many unanswered questions about current bank regulations, I have all the reasons to suspect something equally terribly wrong could be happening in Basel.

Adam Cyralsky wrote about Paolo Macchiarini in ‘The Celebrity Surgeon Who Used Love, Money, and the Pope to Scam an NBC News Producer”, Vanity Fair January 2016.

And there Cyralsky, in order to understand how “someone of considerable stature could construct such elaborate tales and how he could seemingly make others believe them”, turns to Dr. Ronald Schouten, a Harvard professor who directs the Law and Psychiatry Service at Massachusetts General Hospital. The answer he gets is: “We’re taught from an early age that when something is too good to be true, it’s not true… And yet we ignore the signals. People’s critical judgment gets suspended. In this case, that happened at both the personal and institutional level.”

And I translate this to perhaps mean that when bank regulators said: “We can save you from banks failing” and backed it with something that sounded so reasonable as “more risk more capital and less risk less capital”, then the critical judgment of those who appointed them got suspended.

But the world can ill afford such suspension. The credit risk adverse regulations cause banks to finance less and less the risky future; and only refinancing more and more the “safer” past. That has to stop, for the good of our children and grandchildren.

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

@PerKurowski ©