Instead of for known unknowns or unknown unknowns, regulators require banks to hold capital against believed knowns

Sir, Ray Soifer writes: “Dennis Kelleher (Letters, April 19) is right that we do not really know how much capital is necessary to prevent catastrophic bank failures. Indeed, we will never know, because not all the risks faced by financial institutions are “known unknowns”. Some of them will always be “unknown unknowns” until after the fact. Thus, there will always be need for effective supervision and market discipline: the other two legs of Basel’s “three-legged stool”.” “Unknown risks explain need for bank oversight” April 22.

But our bank regulators came up with the brilliant idea that banks should hold capital against what could be seen as perceived known knowns. With their risk weighted capital requirements they doubled down on those perceptions of risk that already influenced decisions on the amount of exposure the bank wanted to hold, and the interest rate to be charged.

So what is perceived safe, which can then be held with less capital, now signals even more safety; and what is perceived as risky, which requires more capital, signals even more riskiness.

Sir if you make the “safer” safer and the “riskier” riskier, do you really think the banks will allocate credit efficiently to the real economy? Of course not!

The “safe” like sovereigns, AAA-risktocracy and housing will get too much access to bank credit; and the “risky” like SMEs and entrepreneurs too little.

“Need for effective supervision” By whom, those who do not understand the distortions they are causing?

“Need for market discipline” What market, that who is now so utterly confused by the risk weighing?

The craziness of this capital requirement regulation is unbelievably large… and therein lays the major obstacle. I hear you: “They can’t be so dumb”. Yes Sir, don’t doubt it, they can!

Sir, “Without fear and without favour” dare ask regulators the following questions:

http://subprimeregulations.blogspot.com/2016/12/must-one-go-on-hunger-strike-to-have.html

@PerKurowski

We need to bring the credit ratings down to earth

Sir, John Authers´ “Easter parade of worries over Uncle Sam´s credit”, April 24, refers to the rating agencies wielding “real power”, but then describes that power only in terms of “affecting the rates at which companies or countries can borrow”; without making any reference to what has yielded the rating agencies the excessive power they posses, namely that the ratings also play a role when defining how much capital a banks needs to have.

It is that the credit ratings are given a double consideration, which has elevated their importance to the skies and brought us the current crisis. Let´s go back to Basel I days, or better yet Basel 0, set one single capital requirement for all bank lending; and then we have brought down the opinions of the rating agencies to something more in harmony with what they really are, a bunch of fallible humans who, had they been laboratories, would have long ago been sued out of the waters for their harmful mistaken opinions.