The “arbiters under fire” should be the bank regulators.

Sir, unfortunately, Aline van Duyn and Richard Milne, in “Arbiters under fire”, July25, fail to clearly identify the reasons why the current bank regulations based on credit ratings are so utterly wrong and make a decoupling such an urgent matter. Those reasons are in short the following: 

1. The market already considers the credit ratings when setting the risk premiums for a borrower which means that also using the same ratings when setting the capital requirements for banks give these ratings an exaggerated weight. Any information, exaggeratedly considered, is made wrong even if originally right. 

2. Regulators do not need to be concerned with credit ratings being right they should only worry about these being wrong. In this respect designing capital requirements for banks that are based on the credit ratings being absolutely right is absolute madness. 

3. Heisenberg´s uncertainty principle coming into play… the more precise you try to measure the creditworthiness of a borrower the more you might affect that same creditworthiness. 

4. The more you try to assure yourself the credit rating agencies perform their duties right, the more you are bound to trust them and consequentially the more fragile will the resulting financial system be. 

I am and have never been a bank regulator, but March 2003, in a published letter to the Financial Times I wrote “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”. Those arbiters who should really be under fire are the bank regulators.

Bank regulators should read up on Heisenberg´s uncertainty principle.

Sir, Mark Carney and Fabio Panettame discuss the growing sovereign risk in “Why banks and supervisors must act now” July 12, since “the risk-free status of sovereign debt is now in question”.

Let us be clear, although concepts like “risk-free interest rates” and similar have been used as theoretical shortcuts for many practical purposes, the only ones who have ever formally awarded a risk-free status to sovereigns, or to anything else for that matter, are the bank regulators with their naïve zero percent weightings of sovereign, which imply that banks needed to hold no capital at all when lending to “risk-free” sovereigns. 

Those mindless capital requirements turned into the cancerogenous substance that originated this crisis. This is the mistake that must be first formally acknowledged by the regulators, so that we can then begin the adjustment process needed to grow out of this hole, instead of allowing the regulators to dig us even deeper into it.

What a pity that regulators never applied Heisenberg´s uncertainty principle, then they would have understood that just measuring the present credit ratings, even with the maximum precision possible, would determine the future credit ratings… in ways they were not capable of understanding.

PS. Loony bank regulations explained in red and blue! http://bit.ly/mQIHoi