March 18, 2010

Regulators, please do no harm, you’ve done enough!

Sir Viral Acharya in “Why bankers must bear the risk of ‘too safe to fail´ assets” March 18, points out that “though AAA –rated tranches and repo financing are relatively safe, their entire risk is systemic in nature” and therefore [bank] regulations “should be more concerned about seemingly fail-safe assets… rather than worrying much about riskier assets”.

As you must have been able to gather from my many (unpublished) letters making the same argument I believe he is absolutely correct. My deepest concern though is how we all landed in the hands of bank regulators so naive as to believe that in a world of intrinsically coward capitals disaster looms where risk is perceived as high and not where the risks are perceived as low and therefore create conditions for stampedes towards safety and that could dangerously overcrowd even the ex-ante safest haven.

Again, for the umpteenth time, we need for our regulators to be fully aware that their regulations could be the source of the worst kind of systemic risk and, if they’re not, then we are much better off without any sort of regulation.

When selecting the regulators we must reduce the risk of a systemic fault or similarity in their thinking process. Now we have only single-minded gnome clones.