Another FT Special Report on Risk Management in Finance that did not mention the risk of regulations

Sir, you publish a special report titled “Risk Management: Finance” March 22. In it not once do you refer to the fact that the current supreme financial risk managers of the world are the banking supervisors in the Basel Committee, and who so arrogantly assume it is their right to set Ground Zero for the rest of the risk managers.

With their risk-weights in Basel II, these inept nuts, and there really is no other word for them, decided that the banks returns on capital could be dramatically increased, by allowing leverages of more than 60 to 1, as long as they kept doing operations related to an officially confirmed no risk situation, a triple A credit rating.

Paul Davies explains “why there is now a greater understanding that there is little guidance to be found from the past when preparing for the future”. But that is only so because most still refuse to look at the recent past, and understand from it than bank regulators cannot discriminate as they did, and do, by means of capital requirements for banks based on perceived risks, without creating monstrous systemic risk.

Brooke Masters writes “now that regulators have moved to impose tougher capital and liquidity requirements, attention is turning to other systemic risk”, which ignores that it was not the lack of toughness of the capital requirements that mostly caused the disaster but the way how they discriminated. What better evidence is there that the 8 per cent capital requirement in Basel II for what is rated BBB+ to BB- has proven more than sufficient and that it is only in the area covered with AAA to A ratings where problems have surged.

Richard Milne writes “Follow the line of debt to spot the coming crisis” and refers to a possible bubble in the public sector, while not saying one word about the fact that banks can lend to the public sector with infinitesimal capital requirements, as long as these sovereigns are rated AAA to A.

But worst of all, the special report again fails to mention the fact that the market’s risk management already clears for perceived risk of default, which includes of course the credit ratings, by means of deciding the risk premiums to be charged in each case, and making all the alternatives investments equal. And so that when the regulators then come and intrusively layer on their own risk biases on the banks, the only thing they are doing is distorting the financial markets, and becoming themselves the greatest source of systemic risk.