Capital requirements for banks based on perceived risks… talk about faith in a flimsy theory

Sir, Wolfgang Münchau writes about “The perils of putting one´s faith in a flimsy theory” in order to decry the not really proven possibility that as has been put forward by some, that 90 percent of public debt to gross domestic product would signify a threshold where more debt begins rapidly to negatively affect economic growth, April 22.

But if we are to talk about flimsy theories, and in which a lot of more faith has been invested, I would hold that the pillar of current bank regulations, namely that capital requirements which are much higher for what is perceived as “risky” than for what is perceived as “absolutely safe” could lead to increased financial stability, that one clearly takes the prize.

Again for the fifth consecutive year I questioned these distorting and odiously discriminating capital requirements during the IMF and World Bank meetings in Washington. Again, as always, I got no answer… for the regulators this is a sacrosanct principle that no one should dare to question... and actually they get upset if you do. Me a heretic!

FT, you urgently need to unclog your own thinking process.

Sir you write “Fixing the banks needs prudential plumbing, not bluntly closing the monetary taps”, “Better plumbing, not closed taps” April 19. And that evidences to me you, as so many experts, are as far away from understanding what is happening as one can be.

The problem is that the whole plumbing of the financial system has been clogged up by capital requirements for banks which favor “The Infallible” and discriminate against “The Risky” and so money is not flowing where it should... but only dangerously overpopulating what are perceived as safe havens and which is where all big bank crises occur. Therefore what we need is less stupidly prudential plumbing before opening the monetary taps.

Perhaps reading a set of questions which I am circulating during the World Bank and IMF’s Spring Meetings in Washington, April 19-20, could help to unclog your own thinking process.