The new regulatory order should correct the faults of the old one

Sir Lawrence Summers lists us “Six principles for a new regulatory order” June 2 and I wish to make the following comments. Though I do agree on that the risk of allowing institutions to determine capital levels based on their own risk models neither do I think it is up for the regulators to intrude artificially with their own subjective rulings. As is the differentiated minimum capital requirements based on credit ratings is imposing an arbitrary layer of risk adverseness on top of the market’s own with quite possibly long term dangerous results as society needs risk-taking in order to develop.

With respect to the need of avoiding that the failure of “an individual institution is not itself a source of systemic risk” there would seem to be no other route than placing limits on the size of the institution, perhaps based on a progressive the-bigger-you-are-the-more-it-will-hurt-if-you-default-on-us tax.

Finally there is a fundamental principle that Summers misses, that of avoiding the risk of the market relying too much upon other, such as the credit rating agencies. The least acknowledged lesson learned from the current sub-prime turmoil is that it would not have happened were it not for the credit rating agencies having been too much empowered by the regulators and a new regulatory order that is build without naming the faults of the previous one has little chance to become better.