A globalized harmonized regulatory approach, imbeds the greatest potential of producing truly fatal systemic risks.

Sir, Rick Lacaille, of State Street Global Advisors concludes with “Only a globally harmonised approach — where regulators and asset managers work together to scrutinise and overcome issues linked to systemic risk — will assure global financial stability.” “Regulators must keep tabs on twin risks of leverage and liquidity” November 26.

I find myself on exactly the opposite side. In 1999 in an Op-Ed I wrote “the possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

Let me just here quote from a list of regulatory mistakes, some relevant principles that are ignored by the current meddling scheming regulators. These are in much perfectly applicable to regulations of asset managers.

To allow bank equity to be leveraged with net margins of assets differently, distorts the allocation of bank credit.

The scarcer the bank capital is, the greater the distortions produced by the risk weighted capital requirements.

Bank capital is to cover for unexpected losses, yet regulators base the requirements on expected credit losses.

The safer something is perceived the greater is its potential for unexpected losses.

The risk of a bank has little to do with perceived risk of assets, and much to do with how the bank manages risks.

Any perfectly perceived risk causes the wrong actions if the risk is excessively considered.

The undue importance given to few information sources, credit rating agencies, introduced a serious systemic risk.

Regulators ignored that imposing similar and specific regulations on a system stiffens it and increases its fragility.

Any regulatory constraint that can be gamed will be gamed benefitting those gaming the most, in detriment of other.

Lacaille writes: “In our view, leverage should remain the guiding indicator of systemic risk. Regulators particularly need to look for managers that operate leveraged strategies, with a focus on identifying and closing loopholes for disguised leveraging.”

The best way of avoiding disguised leveraging is of course not allowing the costumes. One simple capital requirement for all assets would be the most transparent and the least risky way to go.

Will that lead to more risk-taking? Yes, but not to excessive systemically important financial exposures to what is risky. The dangers will, as always, remain being that of excessive financial exposures to what ex ante is perceived as safe, but that ex post can turn out to be risky.

@PerKurowski ©

Before managing other systemic risks, bank regulators should dare confront their own large systemic distortions.

Sir, David Oakley and Barney Jopson report that the Financial Stability Board, wants to go after big asset managers, “Asset managers’ bonds push prompts scrutiny” June 3.

Its reason is the following: “Since the financial crisis, the amount of bonds asset managers have on their books has grown dramatically, filling a void created by big dealer banks that have cut their exposure to fixed income. This shift has triggered worries among regulators about what will happen if a rise in US interest rates sparks a rush for the exit in bond markets — and that prospect has fuelled debate on tougher regulation.

Since a loss is a loss, no matter who has to bear it, huge asset managers, no matter what they say, can produce systemic economic shockwaves, and so of course everyone should be concerned with their risks.

But that said the first thing bank regulators need to do, is to understand how their own regulations have impacted the whole financial sector… in many shapes or forms.

I dare them to organize a seminar on: “What distortions do the portfolio invariant credit-risk-only-weighted capital (equity) requirements for banks cause?”

@PerKurowski