What correlation Andy Haldane? There is not even a regression between perceived risk of assets and major bank crisis.

Sir, Tim Harford mentions that “Andy Haldane, chief economist of the Bank of England, recently argued that economists might want to take mere correlations more seriously”, “Cigarettes, damn cigarettes and statistics” April 11.

I agree and a good place to start would be to even establish whether a correlation exists. Currently regulators have decided that what is perceived as safe from a credit point of view, shall require banks to hold much less equity than what is perceived as risky. That introduces serious distortions in how bank credit is allocated to the real economy.

I presume such equity requirements could only be justified if these helped to make the banks so much safer in such a way, that the benefits that would bring to the economy were larger than the possible negative effects of an inefficient credit allocation. Personally I do not see how that could be.

But no such analysis backs the credit risk weighted equity requirements that currently form the pillar of bank regulations.

Much worse yet, there is not even a regression between the ex ante perceived credit risks of bank exposures and major bank crisis… so there is not even a correlation to look at.

And so yes, Andy Haldane should run that regression, and take the resulting correlation seriously, even if as a regulator he then must eat plenty of humble pie.

I say so because starting from the angle of causation, I expect the correlation Haldane would find would indicate that the safer a bank asset is perceived ex ante, the more danger to the banking system it represents. In other words a 180-degree different relation than what bank regulators actually assume.

Why is it so hard to have regulators following the precept of do no harm?

@PerKurowski

PS. Follow my adventures battling the Basel Committee for Banking Supervision (and the Financial Stability Board)

Mr. John Kay, there is a vital document you must read, in order to understand what is happening.

Sir, it is very hard to understand John Kay´s “Why there is never such a thing as a single true and fair view”, July 30, unless you begin with the premise that Kay does not understand the background or the implications of what he writes either.

For instance Kay says: “If banks had large portfolios of uncorrelated loans, it might make sense to value that portfolio at 99p in the pound: but, as financial institutions discovered yet again in 2008, the outcomes of a portfolio are generally closely correlated”.

Indeed… but Mr. Kay should know by now that bank portfolios had no chance in hell to be uncorrelated, as they had to forcibly be closely correlated to what was perceived as absolutely safe, because of the risk-weighted capital requirements for banks.

How really sad it is that a knowledgeable and influential man like John Kay does not find the time to read the most important document that pertains to current bank regulations, namely the Basel Committee’s “An Explanatory Note on the Basel II IRB (internal ratings-based) Risk Weight Functions” of 2005.

Had he read it he would see that in that document the Basel Committee confesses that the risk-weighted capital requirements are “portfolio invariant”… for the extremely poor reason that because otherwise, bank regulators would not be able to handle the equations.

Holy moly!