June 30, 2016
Sir, with respect to Mark Carney having opined on the risks of Brexit you hold that “It is imperative to stop the attacks on the BOE because the central bank governor must command public confidence to do his job. “This is no time to attack the credibility of the BoE. The leaders of the Brexit campaign owe Mark Carney an apology” July 30.
I cared little about Carney giving opinions on climate change, and I care little about his opinions on Brexit but, Mark Carney is the chair of the Financial Stability Board, and so I do care about him regulating banks, when he does not understanding banking risks.
He does not understand the most basic truth, namely that those dangerously excessive bank exposures that could set of a major bank crisis, are never ever built with assets ex ante perceived as risky but always with assets ex ante perceived as safe. “May God defend me from my friends [what’s safe]: I can defend myself from my enemies [what’s risky]” Voltaire
And Carney has not understood either that allowing for different capital requirements, allows for different leverage of equity or societal support, which produces distorted risk adjusted returns on equity, and which distorts the allocation of bank credit to the real economy. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd
With the Basel Accord of 1988 bank regulators assigned a 0% risk weight for loans to the sovereign and 100% to the private sector. Some years later, 2004, with Basel II, they reduced the risk-weight for loans to those in the private sector rated AAA to AA to 20%, and left the unrated with their 100%.
Sir, do you think it is in the spirit of your Magna Carta to include risk-weights like King John 0%, AAArisktocracy 20% and Englishmen 100%? I do not. And so in essence, the bank regulators, your BoE and your Mark Carney, are messing with the foundations of your country, and you, FT, you keep mum on it.
But I won’t. I will protest those regulations, in all ways possible, not because of England, but because it is too important for the future of my children and grandchildren, my constituency.