A very simple question to all of you there at FT

If you were a bank regulator, which rating would you use to set the capital requirements for banks? That of a borrower defaulting or that of a borrower’s default causing a banks default? I ask, simply because they are clearly not the same.

Monothematic regulators are really not interested in interest rate risk

Sir, Gillian Tett asks on March 11 “Have we really learnt lessons of 1994´s sharp rate spikes?” The answer must be NO, foremost because regulators seem not the least interested in that topic.

Current banks regulations are 100 percent based on perceived risk of defaults… and so all other risks… like the interest rate risk Gillian Tett points out, or the risk that our financial system does not perform adequately its capital allocation function that I worry about… or the thousand of unknown risks that I lie around any next corner, are all ignored by these monothematic regulators.

Stiglitz is still a paradigm away from grasping a new paradigm.

Sir Joseph Stiglitz recognizes “the invisible hand was invisible because it was not there”, and lays the blame for this squarely on “bank managers in their pursuit of their self interest”. “Needed: a new economic paradigm” August 20.

But Stiglitz, is not capable, or willing, of understanding the much more important market interference played by the capital requirements for banks based on perceived risks; which regulators arbitrarily placed as a non-transparent layer of incentives and disincentives on top of the premiums used by the market to clear for risks.

He even speaks about “excessive risk-taking” without getting that since most losses we caused not by for instance investments in Argentinean railroads, but in triple-A rated securities collateralized by mortgages, in the USA, what we really suffered from was an excessive regulatory induced risk-aversion.

That is why I am sure that when Stiglitz mentions that he believes “a new paradigm is within our grasp” he is still just a paradigm as far away from it, as he has ever been.

What have the SMEs done to you?

Sir, what have those being perceived as more risky, like the SMEs, ever done to you, for you to agree with the financial regulators they should be discriminated against by generating higher capital requirements for the banks when they are lent funds?

Don’t you know that there is no risk of excessive investments in what is perceived as risky, like the SMEs, since that risk is taken care of by the sole perception that a risk exists. There is though always a risk of excessive investments in what is perceived as not risky, because that is precisely a risk that the perception of no risk creates.

Therefore requiring the banks to hold higher capital requirements when the perceived risks are higher is just a stupid argument ably exploited by those who just want to lower the capital requirements for banks when these lend to them.

The market already discriminates against perceived risk by charging higher risk premiums. Therefore, for regulators to put on an additional layer of discrimination against higher perceived risk by requiring the banks to hold more capital for what is perceived as risky is as wrong as it can be.

To eliminate the capital requirements based on risks will not signify a subsidy of any sort to the SMEs, what it signifies is the elimination of an onerous discrimination against the SMEs.

Yes, we should all have a say in how banks are reformed

John Kay is absolutely right in that “We should all have a say in how banks are reformed” June 16.

Human and economic development includes an incredible number of different risks of different nature and most perhaps not even known to us, just look at BP. Therefore I have for more than a decade protested those regulators who decided to impose capital requirements by discriminating with their arbitrary risk weights based exclusively on the risk of default, a risk that could only be of such a concern to extremely wimpy regulators.

Indeed, that a creditor defaults is about the most natural thing in the world, and the only way it becomes worrisome is if there is a systemic and massive number of defaults; and which is precisely what the regulators finally caused when with their capital requirement they started a mad chase in search of triple-A ratings, and the market found some Potemkin ones.

Also the sole fact that it can go through a regulators head to discriminate in such a way as to assigning zero capital requirements when a bank lends to a AAA rated sovereign but require 8 percent when it lends to its most natural clients namely the small businesses and entrepreneurs, is maddening. If asked I would even prefer it to be exactly the other way round, though I would happily settle for no discrimination at all, as that is what the least confuses the markets.