June 08, 2011

Just send the regulator geeks packing!

Sir, Sebastian Mallaby in “The Radicals are right to take on the banks” June 8, suggest that the capital requirements for the banks, in order to reserve against the “notoriously treacherous” calculations of the risk-weights, should hold “a further buffer against ‘model error”, aka geeks who screw it up”.

Just in case Mallaby is referring to other geeks, the geeks in this case were the regulator geeks in Basel, who started to play risk-managers for the world setting arbitrary risk-weights based on the perceived risk of default, and that had already been cleared for by the markets. They set for instance a risk-weight of only 20 percent for lending to anything that carried a AAA rating and 100% for lending to unrated small businesses, even though the latter, because they are rightly perceived as more risky, have never ever set of a bank crisis.

The previous utterly confused the whole market, specially the trusting non-geeks, and so the best thing would just to send those regulator geeks packing, and apply one single capital requirement with no risk-weighting.