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

How do you audit risk-weighted capital ratios? What would an auditor say about a zero risk weight?

Sir, ICAEW’s Iain Coke writes that since “Bank’s risk weighted asset calculations and capital ratios are currently unaudited”, “Bank capital ratios need to be audited” Monday 24.

What a great idea! I would love to see bankers and regulators explaining the risk-weights to the auditors…

Mr. Stefan Ingves, you as the current chair of the Basel Committee, how do you explain the zero risk weight for some of your favored sovereigns? And how do you explain that for purpose of setting the capital requirements that are to cover for expected losses you think those perceived as risky in terms of expected losses, can generate more unexpected losses than those perceived safe?

I can’t wait for an ICAEW endorsed audit of a bank’s capital ratio.

Coke writes “People needs to have confidence in bank’s capital formation”. Absolutely, that would be a good thing, but such an audit would certainly also shatter the confidence in bank regulators… and that would also be good, or at least a much needed thing.

@PerKurowski

Will there be a real ECB audit of European banks, or just another nail in the coffin of a lost generation?

Sir you write: “By some accounts [the ECB audit] is expected to reveal that eurozone banks need between €50bn and €100bn”, “ECB needs help on its big bank audit” November 4.

No! That would be what European banks might need if they are just to survive, treading water, refinancing some of Europe’s at least for the time safer sovereigns. But, if banks are going to help to put Europe’s future on their books, like loans to medium and small businesses, entrepreneurs and start ups, then they need new regulations, and many times that amount of capital.

Frankly any ECB audit that does not also include understanding and calculating what also needs to be on European bank balances, will just amount to another nail in the coffin of a generation of young Europeans, lost by an insane and extremely risky regulatory risk aversion

And Sir, FT, for whatever reasons, withholding the truth, shares the responsibility for that tragedy.