December 08, 2010

We need also new rules to keep bank regulators alert and on their toes

Sir, Lord Adair Turner the Chairman of the FSA sustains “We need new rules to keep bankers honest” December 8. Though hoping one could keep all bankers honest with rules sounds a bit too optimistic, we all agree… that is of course as long as it does not affect the rational capital allocation function of the banks by making the bankers too risk-adverse

But, what about those rules we need to keep bank regulators alert and on their toes? Given that it was the regulators who allowed the banks to leverage 62.5 to 1 when investing in triple-A rated securities or lending to Greece or Irish banks, a rule like that one which he proposes for incompetent bankers, namely that they will not be “allowed to perform a similar function at a bank, unless…” should equally apply to regulators.

The minimum minimorum I would ask all current regulators to do is to go back to bank regulating school and take course 101 and which teaches that the only risks that pose a real systemic risk are those perceived as low… and most specially when perceived as low by regulators and bankers alike.

Without any disrespect, Lord Turner would also benefit immensely from such a course.