Mr. Bank Regulators “Tear down that wall!” or that electrified ringfence

Sir, Andrew Tyrie, the chairman of the parliamentary commission on banking standards, argues well to “Electrify the ringfence to shock banks into real reform” January 28, and I like his call for “rebuilding trust in the banks and restoring pride among their employees”.

That said the best way forward to rebuild the banks though, is for the regulators to trust banks and immediately stop interfering with what banks do, by means of imposing capital requirements, and now also liquidity requirements, which are based on an ex ante perceived risk, and mostly as perceived by others, the credit rating agencies.

In fact there is a high voltage electrified wall or fence that needs to be taken down. And I refer to the one which imposes on banks much higher capital requirements on exposures to “The Risky” than to exposures to “The Infallible”. That wall has forced the banks to avoid having relations with for example small and medium businesses and entrepreneurs, and instead indulge in relations with “The Infallible”, to such a degree that we can notice evidence of clear degenerative incest, now especially between the banks and the infallible sovereigns.

Tyrie mentions the bank's lobbying strength, and this can indeed be a big problem. But it would be much more useful if he helps those without a voice, those already being correctly discriminated against by the banks, "The Risky", not having also to be discriminated against by bank regulators. As is "The Risky" those actors who on the margin are the most important for the real economy, get much less access to bank credit and have to pay much more interest rates only because of these regulations. Mr. Tyrie help to tear down that wall! 

PS. Anyone building a wall must always be aware of that he might end up on the wrong side of it. In this case, bank regulators ended up on the side of "The Infallible", precisely those who always cause a bank crisis, because as they should have known those perceived as "The Risky" never do.

Defining the purpose of banks, would be good regulatory behavior

Sir, Bradley Fried writes that when the Commission of Banking Standards resumes it work, it needs to look at the human behavior of the bankers, “Banks have to learn to compete on good behavior”, September 10. And he is more right than he imagines. 

Had for instance regulators been as perceptive about the behavior of bankers as Mark Twain, with his their wanting to lend you the umbrella when the sun shines and take it away when it rains, they would never have come up with such daft regulations as their capital requirements for banks based on perceived risk. Or, if they had still used perceived risks, then perhaps they would have set these totally opposite to the current ones, the lower the perceived risk the higher the capital requirement. 

But let us hope bank regulators also learn to compete on good behavior, and come understand that, when you regulate something, it is good behavior first to define its purpose.