October 01, 2018

Bank regulators’ feelings trumped their expertise

Sir, Julian Baggini when discussing William Davies’ “Nervous States: How feeling took over the world” writes “The way Davies describes it, this challenges our understanding of “reason”, since “the expert claim to be able to separate ‘feelings’ from ‘knowledge’ becomes impossible to sustain”, “The age of unreason”,September 28 

How could I not agree with that? For more than a decade I have not been able to have bank regulators to accept that their risk-weighted capital requirements for banks make no sense. Our conversations go nowhere when I see them despairing with: “Yes, I can understand that what’s perceived as safe is much more dangerous to our bank system than what’s perceived as risky, but I just can’t help feeling so much more scared of what I perceive as risky” 

And this applies to journalists too. In July 2012 Martin Wolf wrote: “As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk. For this reason, unweighted leverage matters. It needs to be far lower.” Wolf’s feelings still make it impossible for him to digest the full extent of the Basel Committee’s mistake.