March 13, 2017

Regulatory easing, if done right, could make risk managers of banks care about real risks, not just about capital reductions.

Sir, Laura Noonan reports that risk models have more uses than assessing capital levels “Regulatory easing will not kill off the model makers” March 13.

What kinds of easing? Because of the risk weighted capital requirements for banks, risk managers have lately been operating with one single mandate… namely that of reducing the capital needed, so as to help maximize the allowed leverage, so as to be able to produce truly large risk adjusted returns on equity.

In essence that has signified that banks, if compared to Volkswagen, have been able to control their own emissions, with the emission managers having been instructed to maximize these. Crazy? Yes!

So if the easing signifies the elimination of different capital requirements for banks, then risk managers could begin to serve a real purpose instead of a regulatory one.

Then SMEs and entrepreneurs would be able to compete on level ground for access to bank credit with sovereigns, AAA rated or residential mortgages, as they have been able to do during around 600 years, before the Basel Committee messed it all up for them. 

But Sir, I am not sure that is the kind of regulatory easing banks are after.