The best bank regulator knows absolutely everything about banking… or nothing at all.

Sir, Patrick Jenkins, in “Bank of England needs more than a new governor”, February 21, comments on how much a governor might need to know about banking in order to understand the banks it will soon have to regulate. My answer is either all or nothing at all. Let me explain. 

If bankers knew what they were up to and their risk perceptions and risk models were perfect, then there would be no problems. Therefore the regulators should never ever bet the house on the bankers being correct, as they currently do with their capital requirements for banks based on perceived risk, but always prepare for the consequences of the bankers being wrong. 

And those best positioned to do so are either the ones who know absolutely nothing of the risk perceptions and risk models, and therefore do not want to have anything to do with these, or those who know everything about risk perceptions and risk models, and therefore also do not want to have anything to do with these. 

The truly dangerous ones are those who know a little about risk perceptions and risk models but who do not want to admit to any ignorance. In other words the truly dangerous bank regulators are precisely those we have.