February 06, 2018

Risk weighted capital requirements for banks guarantee banks will have the least capital when the worst crises occur

Sir, Jim Brunsden and Cat Rutter Pooley write that Mario Draghi “said that speedy work was needed to conclude talks on an overhaul of bank rules that had been under discussion for more than a year. The reforms would introduce the latest international standards aimed at making the financial system more resilient to crises”, “Draghi warns banks of Brexit ‘frictions’” February 6.

Sir, again, for the umpteenth time, the price of being “More resilient to crises” in the way current regulators propose, is only to be more exposed when crises happen? This is because the risk weighted capital requirements for banks that still, quite surrealistically, form part of regulations, by giving banks incentives to stay away from what is perceived as risky, might reduce the number of crisis, but that at the price of banks having especially little capital, right when the worst crises happen, namely those that result from something ex ante perceived, decreed or concocter as very safe turn out ex post to be very risky.

Sir, again, for the umpteenth time, your banking systems are in hands of regulators who cannot answer: “Why do you want banks to hold more capital against what’s been made innocous when perceived as risky, than against what’s dangerous because it’s perceived as safe? Does this not set the world up for slow growth and too-big-to-manage crises?”

But, then again, “Without fear and without favour” FT does not dare ask regulators those questions either.

PS. Brunsden and Cat Rutter Pooley also write that “Michel Barnier, EU chief negotiator visiting London, that “the time has come” for Britain to make a choice about what kind of future relationship it wants.” Does Barnier, know what future relation the EU wants with Britain after Brexit, or is it that he thinks he speaks for all Europe?