When compared to irrational regulatory exuberance, the usual market one seems like small fry.

Sir, John Kay refers to an “implausible faith in the markets”, which clearly exists, and which is clearly dumb, but which, unfortunately, is surpassed by an implausible faith in the regulators, “Only market evangelist can reconcile Jekyll with Hyde”, June 6. 

Let us just look at one example. Basel II established that banks were required to hold 8 percent in capital when lending to an unrated small business, 1.6 percent when lending to a sovereign rated like Greece was recently and zero percent when lending to a truly “infallible” sovereign, like for instance Germany. 

And that meant that banks were allowed to leverage their equity 12.5, 62.5, and infinitely to 1, and with that regulators who with much hubris thought themselves capable to act as the risk-managers of the world, considered they had eliminated bank crisis forever. Has Mr. Kay seen any type of irrational market exuberance that surpasses this irrational regulatory exuberance?

Financial Times, please help… save the world from our financial regulators´ regulatory exuberance!

There has never ever been a major or systemic bank crisis that has resulted from the banks being involved with what ex-ante was perceived as risky; they all resulted from lending and investing in what ex-ante was considered as not risky, given the returns offered.


But then came the Basel Committee regulators and, to top it up, lowered the capital requirements for what ex-ante is perceived by the credit rating agencies as having lower risks, which of course increased the banks’ expected ex-ante returns from pursuing these “low risk” opportunities.

And now, when two years after an explosion that resulted from so many banks following the minuscule capital requirements when investing in securities collateralized with subprime mortgages; and there is a bank explosion awaiting round the corner because of bank lending to well rated fancy sovereigns, like Greece, with almost no capital requirements at all; they keep on applying the same regulatory paradigm of risk-weighted assets, we can only deduct that our financial regulators simply do not get it, not even ex-post.

Please, FT, help save the world from our financial regulators´ regulatory exuberance!