June 28, 2011

“Careful, take cover, run for the shadows!”

Sir, Gillian Tett in “Why they´re happy in the valley of the shadow banks” June 28 worries because “notwithstanding the fact that the financial crisis largely started in the non-bank sector, or shadow bank world, thus far at least, western regulators have focused most of the reform efforts on the regulated banks”. Where does she get that first part from? And why would she assume that the shadow world behaves worse than the formal regulated one? For instance, there are no regulations on hedge funds, but rarely do you see any of them being leveraged more than 10 to 1, but you sure found regulated banks with a duly authorized leverage of over 50 to 1. Let me be frank, with bank regulators like the current, the only reason why I would place my money in regulated banks, is not because of the regulations, it is for the protections that might anyhow be present… in other words a 110% moral hazard risk.

Right now, even after the recently increased capital requirement of 9 percent to be applied to global systemic important financial institutions, these might still leverage 55 to 1 when lending or investing in what carries a risk-weight of 20%, the same risk-weight that applied for triple-A rated securities collateralized with mortgages to the subprime sector, for lending to Icelandic banks, or for lending to Greece. Sincerely, observing that, any advisor could have all the right to shout out “Careful, take cover, run for the shadows”