Had regulators left their desk and soiled their shoes, our banks and our economies would be in much better shape.
The first Op-Ed ever I wrote Puritanism in Banking was the result of suddenly having a feeling that many of my clients who, because they were perceived as “risky” always found it harder to access bank credit, were suddenly faced by even larger difficulties, as a result of new bank regulations coming out of Basel.
The “expert” bank regulators there, scared to death of banks failing, from their desks declared that more-perceived-risk more-capital and less-perceived-risk less-capital, and believed that should take care of it all.
They did not walk history to understand that what is ex ante perceived as risky never ever has created those excessive exposures that crises are made of, those have always resulted from excessive exposures to what was perceived as very safe when incorporated on the balance sheets of banks.
And they did not walk main-street so as to understand that banks already clear for perceived risks, with size of exposures and risk premiums, and therefore, when they cleared for the same perceived risk again in the capital, they over-sensitized the system to perceived risk. And even though they stayed at their desks the experts blithely ignored that any risk, even if perfectly perceived, causes the wrong actions, if excessively considered.
And here we are and even in the face of failure, the regulators still refuse to walk and soil their shoes. Let’s take away their desks!