Why do financial regulatory authorities, while preaching the value of diversification, act in favor of concentration?

Sir I refer to Harriet Agnew’s “FT BIG READ. Professional Services: Accounting for change” August 28.

In November 1999, in an Op-Ed in Caracas Venezuela, this is what I had to say on what is discussed there:

“I recently heard that SEC was establishing higher capital requirements for stockbroker firms, arguing that . . . ‘the weak have to merge to remain. We have to get rid of the rotten apples so that we can renew the trust in the system.’ As I read it, it establishes a very dangerous relationship between weak and rotten. In fact, the financially weakest stockbroker in the system could be providing the most honest services while the big ones, just because of their size, can also bring down the whole world. It has always surprised me how the financial regulatory authorities, while preaching the value of diversification, act in favor of concentration.

The SEC should not substitute the need for capital in place of the need for ethics, nor should it allow that fraudulent behavior hides amid the anonymity of huge firms. In this respect, let us not forget that the risk of social sanctions should be one of the most fundamental tools in controlling financial activities.

Currently market forces favors the larger the entity is, be it banks, law firms, auditing firms, brokers, etc. Perhaps one of the things that the authorities could do, in order to diversify risks, is to create a tax on size.”

@PerKurowski

EY, when focusing on tax in developing economies, why ignore the most pernicious development tax, that on risk-taking?

Sir, I refer to EY’s inlay “Tax – Insights for business leaders: With a focus on developing economies” May 21.

Bank regulators, with their Basel Accord of 1988 decided, God knows why, that sovereigns were much safer than the citizens who make them up, and that therefore banks needed to hold much less equity when lending to sovereigns than when ending to citizens, like to SMEs and entrepreneurs.

And that, no matter how you want to bend it or hide it, means that banks, compared to a free market without these regulations, will lend more to sovereigns and less to citizens.

And that, no matter how you want to bend it or hide it, means a regulatory subsidy to sovereigns and a tax on citizens.

And this is an especially pernicious tax in a developing country that copycats those regulations, since risk-taking is the oxygen of any development.

And yet EY blatantly ignore this tax that directly taxes development. Why?

EY should perhaps talk with you Sir.

FT, you know I have sent you more than a thousand of letters on this issue, and though you have been ignoring these the last decade, in November 2004 you did publish a letter in which I wrote: “We also wonder in how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

@PerKurowski