October 18, 2016

Could it be current bank regulators are not held accountable because their mistakes are just too big to fathom?

Sir, Jonathan Ford with respect to Wells Fargo’s “misdemeanors” asks “why supposedly competent managers failed to join the dots”; and correctly states that “one reason why public confidence in Wall Street remains so low… [is that the] bosses are not held accountable” “If no bank is ‘too big to jail’, Wells Fargo bosses must face the music” October 17.

Now with respect to banks, their purpose and their stability, there are two very clear dots:

1. If you allow banks to leverage their equity, or the support they receive from society, more with some assets than with other, then you will distort the allocation of credit to the real economy.

2. What is dangerous for bank systems, is never what is ex ante perceived as risky, but always either some unexpected event, or the build-up of dangerous excessive exposures to something that ex ante was perceived as safe but that ex post turned out not to be.

So, if regulators impose capital requirements that allow banks to leverage more with assets ex ante perceived as safe, then I would hold that is clear evidence of them not being able to connect even the most basic dots. Should they not be held accountable? Of course they should, but they aren’t.

I fully agree with Ford’s opinion that even though “little money was taken” in Wells Fargo’s “misdeeds” being discussed “that doesn’t diminish the bank’s culpability”

But could it be though that some mistakes, like those committed by current bank regulators, are just so big they can’t even be discussed? If so, we, and foremost the next generations, are doomed.

@PerKurowski ©