Showing posts with label systemic important financial institutions. Show all posts
Showing posts with label systemic important financial institutions. Show all posts

September 19, 2012

Before going after the titans of Wall Street, we need to go after the petit bureaucrats of bank regulations

Sir, John Kay ends an article that includes many truths about bank regulations with “the only sustainable answer to the issue of systemically important financial institutions is to limit the domain of systemic importance. Until politicians are prepared to face down Wall Street titans on that issue, regulatory reform will not be serious.” “Take on Wall Street titans if you want reforms” September 19. 

Yes, but, the systemically important financial institutions grew to be systemically important institutions, much with the help of bank regulators who, I do not really know with what authority, decided that banks could hold many assets against little or no capital, as long as these assets were perceived as “not-risky”. 

Had for instance Basel II decided that banks would need 8 percent of capital for any asset it held, we might still have systemically important financial institutions, but their systemic importance would be just a fraction of their current. 

And since there has been about five years since the crisis began, and current bank regulators have still not admitted the simple truth that their capital requirements based on perceived risk distort the markets, before we hit the titans of Wall Street down, we have to hit the petit bureaucrats of bank regulations who believe themselves titans in risk management down. 

John Kay also wrote that any capital target “will be gamed by those who observed the letter rather than its spirit”. Yes that is true, that is a fact of life, but, let us at least not have petit regulators also trying to simultaneously game the markets with their silly risk-adverse risk-weights. 

Frankly, who authorized bank regulators to do to our banks what they did?