And then there is also the “too bad to regulate”.

Sir Peter Thal Larsen writing about financial regulations in “A lot to be straightened out” March 31 comments on the option to submit the “too large to fail” to have to pay a hefty fee for the support they enjoy.

As an Executive Director of the World Bank (2002-2004) at a Risk Management Workshop for Regulators held at the World Bank in May 2003 as I said the following.

“Some old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, seem much wiser than today’s no burning at all that only allows for the build-up of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.Knowing that “the larger they are the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size.”

Sincerely do we really need regulators that have to wait for a catastrophe before coming to reason? Looking at the regulators utterly silly behaviour over the last decade or so it becomes clear that we also have a problem with regulators that are too bad to regulate.

Let us pray it is not too late.

Sir Peter Thal Larsen reports January 21 that the “UK regulator helps to ease the pressure” lowering the capital requirements for banks when at the “low point of the cycle”. Not a minute too late.

Requiring higher capital when already awarded credits are being discovered to be more risky than previously thought, and allowing lower capital when credits could be perceived to be less risky, is one of the fundamental ways how the financial regulators that were responsible for the Basel framework created and leveraged new cyclicality for the world to suffer. Shame on them!

Listening to their “we did not know” is just the reason we do know that bank regulations must not be allowed to remain an exclusive and reserved affair for bank regulators.

More toughness is needed in Basel in order to get bankers moving instead of the Congress.

Sir I much appreciated Peter Thal Larsen’s “Withdrawal unavailable” December 6. At long last someone has given enough importance to how minimum capital requirements imposed by the Basel Committee is a constrain on new banking business, among other because they force the banks first to dry up any already spilled milk. Official efforts to get the bank credit moving should of course start with introducing modifications of those capital requirements, unfortunately our so risk adverse regulator wimps do not even dare to enter that terrain. When the going gets tough we need to call in the tough!

Instead of having a Congress requests such ridiculous things like the senior management of the automotive industry driving to Washington in order to access new credit, the Congress should be asking the banks about what they would need to start putting that kind of automotive risk on their books again.

Finally, when Thal Larsen quotes Robert Self of Credit Suisse saying that the appetite for yields drove a lot of demand for mortgage backed securities, this is just not so. The yields themselves were nothing to write home about and the risk-reward ratio was deemed to be attractive only because these securities had triple-A ratings. Without these ratings no one, and I mean no one, would have purchased these securities. Moreover without those triple-A ratings we would not even be in this crisis.

The bank directors have the mother of all the good excuses.

Sir Francesco Guerrera and Peter Thal Larsen wrote a full pager on June 26, 2008 titled “Gone by the Board?” on why the directors of big banks failed to spot the credit risk. Though it is not my intention or role to defend bank directors I must in all honesty say that they completely left out the most important argument the directors could use in their defence.

Just think about a knowledgeable and a responsible director’s chances to convince his fellow directors that the securities backed with subprime mortgages and rated prime by the credit rating agencies and appointed to such a task by the bank regulators themselves were not prime as he had heard rumours that the mortgages were not awarded with the same usual care. None? I would say so.

If you want a board to act you have to let it act and not let them believe that the credit rating agencies are doing the job for them.