The way FT insists in treating bank regulators so gently, can only lead us to conclude it is part of the establishment

Sir, with respect to Italian bank securities, like Monte dei Paschi di Siena’s €6bn of junior bonds, Patrick Jenkins writes that “it was the banks — not the state — that mis-sold these”, “Italian state must act as backstop to bolster ailing banking system” December 6.

Why on earth does Jenkins’, and you all, defend in such a way the innocence of the state, or more precisely, that of the bank-regulating establishment? Had regulators no responsibility towards the buyers of these bonds? No Sir, I tell you FT has no role washing the hands of the regulators.

First, what got banks into problems, were that regulators allowed banks to hold very low capital against what was perceived as safe. Though of course much of what could have been perceived as risky has suffered a lot after the crisis, nothing of that detonated it. And, if what was perceived ex ante as “safe” would have required banks to hold the same capital as against what was perceived as risky, the overall crisis would not have happened, or would have been much smaller.

Second, don’t tell me that regulators, with their reports on satisfactory levels of capital against risk weighted assets, have not been misinforming the markets all the time, and not only in Italy. Time after time we read or hear “experts” comparing bank capitalizations in the past against all assets, with capitalizations in the present against weighted assets. And that is apples and oranges of course. 

@PerKurowski

What if a holder of a bank bond who loses his investment in a bank tries to sue the regulators?

Sir, I refer to Jim Brunsden’s, Patrick Jenkins’ and Rachel Sanderson’s FT’s Big Read “Bondholders on the hook” January 5.

Suppose a bank that has too much exposure against too little capital to something that is ex ante perceived as safe but that ex post turns out to be very risky collapses.

And suppose reports on the bank indicated that all was fine and dandy because the bank had more than enough capital against risk-weighted assets to meet the Basel Committee's criteria.

So what if a holder of a bank bond that loses his investment goes in front of a judge and argues the failure happened because regulators created set wrong incentives and that they authorized the issuance of confusing information that understated the bank’s real leverage?

I am no lawyer so I have no idea about the final consequences, but I sure would like to see that trial and hear the judge’s opinion when he gets to understand the full extent of what has been going on.

@PerKurowski ©