When will someone invited dare to pose the question that shall not be made at a Davos or Jackson Hole gathering?
Sir, Gillian Tett writes: “The International Monetary Fund calculates that between 1970 and 2011, the world has suffered 147 banking crises... But whatever their statistical size, the pre-crisis period is marked by hubris, greed, opacity — and a tunnel vision among financiers that makes it impossible for them to assess risks.”, “When the world held its breath” September 1.
Sir, and why should regulators, who impose risk weighted capital requirements for banks, and stress test these be less affected by that “tunnel vision”?
If regulators knew about conditional probabilities, if they absolutely wanted and dared to distort the allocation of bank credit, they would have set their risk weights based, not on the perceived risks of assets, but on how bankers’ perceive and manage risks.
Tett quotes Alan Greenspan with “I originally assumed that people would act in a wholly rational way, that turned out to be wrong.” Shame on him, had he just done his homework, he would have known that what was perceived as risky never ever causes financial crises, that is always the role of what was thought as very safe.
Tett also quotes Paul Tucker, the former deputy governor of the Bank of England with, “There is a dynamic which pushes banking and the penumbra of banking to excess, over and over again”. That “dynamic” force was the regulators pushing bankers into excesses, for instance by allowing them to leverage 62.5 times if only an AAA to AA rating issued by human fallible credit rating agencies was present.
Tett recounts: “One day in the early summer of 2007, I received an email out of the blue from an erudite Japanese central banker called Hiroshi Nakaso”, who warned her “that a financial crisis was about to explode because of problems in the American mortgage and credit market.”
Tett was astonished, though she did, by then, not disagree with the analysis. May 19th 2007 I wrote the following letter to FT, which was not published.
“Sir, after reading Gillian Tett’s “A headache is in store when the credit party fizzles out” May 19, it is clear we should all go down on our knees and pray for that she is right, in that it is only a headache that is in store for us.
As for myself I have serious doubts that the consequence of this blissful-ignorance-bubble resulting from our hide-and-not-seek the risks with derivatives, is unfortunately going to be much more painful than that. When that day comes though, before putting the sole blame on the poor bankers earning their luxurious daily keep; I suggest we look much closer at the responsibility of our financial regulators.”
Sir, sadly, that suggestion has been way too much ignored until now.
“Why do you require banks to hold more capital against what by being perceived as risky is made less dangerous to our bank systems, than against what by being perceived as safe, poses so many more dangers?” That is the questions that seemingly shall not be asked by anyone who markets his name in the debate and does not want to risk being left out from Davos or Jackson Hole gatherings.
@PerKurowski
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