It’s sad when we need to remind regulators to prepare for the unexpected

“The time to prepare for the next threat is now”, that’s how Bill Emmott ends his “How to build global resilience after the pandemic” FT, May 25.

Sir, Mark Twain, supposedly, said: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it looks to rain”

Today, if alive, with respect to Basel Committee’s risk weighted bank capital requirements, Mark Twain would have opined: “A bank regulator is a fellow who allows banks to hold little capital when the sun shines, so these can pay lots of bonuses and dividends and buy back lots of stock, but wants banks to hold much more capital, the moment the rain starts”

PS. Emmott writes “But there must be an international accord on debt restructuring, akin to the Brady Plan in the early 1990s.” I lived through that restructuring. It was made feasible by developing countries being able, because US$ interest rates were high, to very inexpensively purchase US$ 30 years zero coupon bonds issued by the US, in order to guarantee the repayment of the principal of their debts. In a world of ultra-low, even negative interest rates, what’s the price of such bonds?

@PerKurowski

Current bank regulators not only do not know what they are doing, they even double down on their ignorance

Sir, Robert Lenzner writes “Seven years after the worst crash since 1929, the alarming fact is that financial regulators still know next to nothing about the true level of risk that big banks are exposed to”, “Hidden dangers that banking regulators cannot understand”, April 21.

Of course they don’t, and I have been telling you so in more than 1.800 letters over the last decade. Any regulator who sets the equity requirements for banks based on the risk of their assets, and not based on the risks that have always caused the banks to fail, has no idea about what he is doing.

And any regulator who allows banks to leverage differently for different assets, and thereby distorts the allocation of bank credit to the real economy, is only doubling down on his ignorance.

@PerKurowski