Gillian Tett describes another reason for using a tangible equity to asset ratio as suggested by Thomas M. Hoenig of FDIC.

Sir, Gillian Tett is on the dot with her warnings in “Watch out for the interest rate hike hit to US banks”, July 14.

And so there we have it again, with regulators fixated with credit risk, while ignoring most of the other millions of risks that abound. Here banks, not only in the US but all over the world, could be holding long term and fixed rate assets classified as absolutely safe, and therefore allowed to be held against very little capital, all of which could be wiped out by some minor interest rates hike.

This is just another evidence for why one simple capital requirement, in my opinion between 8 and 10 percent of tangible equity to assets ratio, such as the one Thomas M. Hoenig of the FDIC is proposing would make so much more sense. In fact any other type of micromanagement would only constitute an expression of regulatory hubris.

About “Why bank regulators are intellectually naked”, and about besserwisser journalists

Sir, Martin Wolf has suddenly seen light as he now writes “A sophisticated mistake is the idea that capital can be properly ‘risk-weighted’. This has proved fatally flawed”, “Why bankers are intellectually naked” March 18.

I have over the last five years written more than a hundred of letters to the editor commenting on articles by Martin Wolf explaining that capital requirements for banks based on perceived risks which have already been cleared for, is sheer stupidity, and creates all type of distortions. But my arguments have been mostly ignored and Wolf has even qualified me as a monothematic bore… something which I accept might very well be true, but all for a good cause.

And so of course I will read “The Bankers’ New Clothes” by Anat Admati and Martin Hellwig, with much interest, to see with what arguments they finally convinced Wolf. That is of course as long as Wolf’s new found conviction is the correct one. I say this because why then did he not title his book review “Why bank regulators are intellectually naked”

Wolf writes the book reveals why “we have failed to remove the causes of the crisis”, and I wonder whether the arrogant besserwisser attitude of some financial journalists who think they know it all, might be included there.

PS. I have not read it yet, but if Admati and Hellwig’s suggestion of a 20-30 percent equity ratio is based on risk-weighted assets, then sadly they have not understood it completely either, and the distortions could be even worse. And, if that 20-30 ratio is for unweighted assets, then it would be very interesting to hear how they propose to raise the bank capital needed to fill the hole created by the zero percent risk-weighting of sovereigns.

PS. Sir, just to remind you that I am not copying Martin Wolf more. He has told me not to send him anything more on “capital requirements”… he already knows it all, so he thinks.