The capital requirements for banks based on perceived risk, distort the correct risk pricing that the market might have done.

Sir, Simon Johnson writes about the risk of “Concentrating risk with the laudable goal of reducing opaqueness”… “Chaos is brewing behind the clearing house doors” June 18.

Absolutely, that was precisely what happened when regulators decided to concentrate in the hands of very few human fallible rating agencies, so much of the risk perceptions in the banking system… and look at what happened.

But, when Johnson begins lining up AIG, Fannie Mae and Freddie Mac as causing big distortions in the pricing of risk, I do not agree. The most fundamental distortions in the pricing of risks are the result of the regulators, with their capital requirements for banks based on perceived risk, distorting the correct risk pricing that the market might have done.

Force bank regulators to answer the question they do not dare to discuss.

Sir, Henny Sender asks: “As the disconnect between the rising prices of financial assets and the real economy continues, is it possible that even the most aggressive easing has its limits?”, “End point for runaway stocks rally comes in sight”, November 30.

The answer is… Yes! Moreover its limits have already been shown. I am sure that if the Fed only researched how much of all QEs and fiscal stimulus has translated into more bank credit to those on the margins of the real economy, and who are most in need of credit, like small businesses, entrepreneurs and start ups, they would be shocked at how little they would find.

But they won´t do that because if so they would have to ask themselves “why?” and that would lead to having to admit how seriously flawed or outright dumb the capital requirements for banks based on perceived risks are.

You see the question that the regulators dare not to discuss is:

If the perceived risks are cleared for in interest rates, size of exposure and other terms, does not re-clearing for the same perceived risk cause a serious distortion in how bank credit is allocated in the real economy?

It just compensates bankers´ love of chocolate cake (the safe) with ice cream, and their loathing of broccoli (the risky) with spinach.

If fighting groupthink, start with the worst, with bank regulators, Basel Committee and Financial Stability Board

Sir John Authers asks and answers “Can globalized capital markets coexist with democracy and the nation state? It is reasonable now to fear the answer is “no”, and that means reforming the investment industry should be a far higher priority”, “Fund management reform will help avert groupthink” November 25.

I have no idea why Authers goes after the fund management’s groupthink first and not after bank regulators’ groupthink which has been so much more perverse.

Let me just ask:

What kind of smartass idea is it to require banks to hold capital based on the same ex ante perceived risks which have already been cleared for by markets and banks by means of interest rates, size of exposure and other terms? Could the group of regulators not figure out this dooms the banks to overdose on perceived risks and the risk-price equation to go haywire?

And what democracy approved that for instance a bank in Spain needed to hold 8 percent in capital when lending to a Spanish medium or small business, entrepreneur or startup but could lend, for instance to the government of France, holding zero capital?

No! Globalized market cannot coexist with the dumb groupthink produced by that small mutual admiration club comprised by the Basel Committee and the Financial Stability Board.