September 11, 2009

Markets price risk solely in interest spreads which is why the regulators’ “risk weights” only brings confusion.

Sir with respect to Martin Wolf’s “Turner is asking the right questions” September 11, and who I see is now much closer to accept that this crisis was caused more by bad finances than by the abundant economic disequilibrium that existed and still exist, my very fundamental difference in opinion is the following.

Because the market prices risk solely through interest rates spreads, the interference of the regulators pricing it by means of “risk weights”, which lead to different capital requirements, creates much confusion in the risk allocation mechanisms; and we therefore need to eliminate all regulatory risk-discrimination. In other words, between a Tobin tax that can function as a speed bump and provide some “due diligence”, and capital requirements that “forcefully” channel funds into different risk territories I am all for the first and all against the latter.

As a consequence the credit rating agencies should revert to their traditional role as risk informers instead of being the risk decision makers the regulators turned them into.