Instead of for known unknowns or unknown unknowns, regulators require banks to hold capital against believed knowns

Sir, Ray Soifer writes: “Dennis Kelleher (Letters, April 19) is right that we do not really know how much capital is necessary to prevent catastrophic bank failures. Indeed, we will never know, because not all the risks faced by financial institutions are “known unknowns”. Some of them will always be “unknown unknowns” until after the fact. Thus, there will always be need for effective supervision and market discipline: the other two legs of Basel’s “three-legged stool”.” “Unknown risks explain need for bank oversight” April 22.

But our bank regulators came up with the brilliant idea that banks should hold capital against what could be seen as perceived known knowns. With their risk weighted capital requirements they doubled down on those perceptions of risk that already influenced decisions on the amount of exposure the bank wanted to hold, and the interest rate to be charged.

So what is perceived safe, which can then be held with less capital, now signals even more safety; and what is perceived as risky, which requires more capital, signals even more riskiness.

Sir if you make the “safer” safer and the “riskier” riskier, do you really think the banks will allocate credit efficiently to the real economy? Of course not!

The “safe” like sovereigns, AAA-risktocracy and housing will get too much access to bank credit; and the “risky” like SMEs and entrepreneurs too little.

“Need for effective supervision” By whom, those who do not understand the distortions they are causing?

“Need for market discipline” What market, that who is now so utterly confused by the risk weighing?

The craziness of this capital requirement regulation is unbelievably large… and therein lays the major obstacle. I hear you: “They can’t be so dumb”. Yes Sir, don’t doubt it, they can!

Sir, “Without fear and without favour” dare ask regulators the following questions:

http://subprimeregulations.blogspot.com/2016/12/must-one-go-on-hunger-strike-to-have.html

@PerKurowski

Protecting investors and markets too much, guarantees low growth and huge catastrophes

Sir, Dennis M Kelleher, President and CEO, Better Markets, Washington, DC, US writes “that sustainable market-based finance and economic growth require robust regulation that protects investors and markets while preventing catastrophic crashes like that of 2008” “False choice between growth and regulation” April 29.

Boy is he off the tracks! The pillar of banks regulations, the risk weighted capital requirements for banks, hindered robust growth by making it harder for the risky SMEs and entrepreneurs to access bank credit, and caused the crisis by pushing banks to create dangerous and excessive exposures to what was perceived, decreed or concocted as safe… like mortgages, AAA rated securities and sovereigns like Greece.

And the continued use of the credit-risk aversion imbedded in risk weighted capital requirements guarantees that the economy will stall and fall… only setting us up to the next catastrophe, when the next safe-haven becomes overpopulated. 

Quite the contrary to what Mr Kelleher believes, making sure that banks and bad investment fail, as fast and expedient as possible, helps the economy to grow and at the same time prevents the build up of too much dangerous combustible material.

The regulations that can produce “non-bubble, non-financial sustainable growth in the real economy that produces employment and rising living standards” are those allowing the markets to work better, like antitrust legislation, not substituting with robust regulations the actions of the markets.

PS. Here is a summary of why I consider those in the Basel Committee idiots.

@PerKurowski ©