March 02, 2011

Beware of cuddling up too much with comforting regulatory teddy-bears, they could be poisonous.

Sir, John Kay in “Don’t blame luck when your models misfire” March 2, gets to the core of our problems with the regulatory monopoly of the Basel Committee that has been empowered, God knows how.

The Basel Committee instead of as regulators be highly skeptical about anyone’s ability of perfectly understanding and measuring risks, arrogantly took upon themselves to act as the risk-managers of the world and with their risk-weights which caused the capital requirements for the banks to be absurdly low whenever a triple-A rating was involved, they altered Zero Ground and naturally tempted the bankers to enter into the triple-A rated waters where the sharks of the real economy were waiting for them.

During my days as one of 24 Executive Directors in the World Bank (2002-2004) I repeated over and over the arguments presented by John Kay, but no one wanted to really listen, (just like FT doesn’t want to) since the thought of being able to control for risks sounds so comforting no one wants to give it up… and so the possibilities of finding clientele for the next risk controlling potion introduced are of course boundless.

In such circumstance the best we can do is to try to make certain that the systemic risks of any risk-avoidance scheme to which we want to snuggle up sucking thumbs are not themselves larger than the risks we want to be protected from. Unfortunately there are many who have a vested interest in hiding the fact that they sold us a poisoned regulatory teddy-bear.