June 22, 2016
Sir, Caroline Binham, Stephen Foley and Madison Marriage report “Systemwide and individual stress-testing of asset managers, as well as examining whether greater disclosure should be made by mutual funds, were among 14 recommendations made by the Basel-based Financial Stability Board to authorities across the G20 nations yesterday” “Stress test asset managers, says FSB” June 23.
Much more important for us is to stress-test bank regulators, to be sure they really know what they’re doing.
Since about two decades I have been asking regulators many questions that have not been answered. And so for a start I would like to ask Mark Carney, the current chair of the FSB; Mario Draghi, the former chair of FSB and the current chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision; and Stefan Ingves the current chair of the Basel Committee, the following:
For the purpose of setting the capital requirements for banks, in Basel II you assigned a risk weight of 150 percent to what is rated highly speculative and worse, below BB- but only 20 percent to what is rated AAA to AA.
Gentlemen why did you do that? Major bank crises have never ever resulted from excessive exposures to what is perceived as really risky, but always from what ex ante was perceived as safe but that ex post turned out not to be.
If these regulators are not capable of giving us a credible answer, then I submit they are not capable enough to stress test any bank, asset manager or mutual fund.
And, if they dare answer the first question, then make them explain all this!