June 27, 2012

Bank regulations are beset with nanny populism

Sir, Nick Clegg in “Be alive to the risks and rewards of a banking union” June 27, states “We have put in place a bank levy, weighted towards riskier activities”. That is pure unadulterated bank regulatory nanny populism, as it implies that the government, ex ante, knows more than the market and the banks about which are the riskier activities, ex post. 

To know how wrong that is it suffices to see what caused the current crisis, namely excessive pure vanilla investments and loans to what was considered officially as not risky and therefore required minimum capital of the banks. 

Mr. Clegg, and all of you other intellectual prisoners of the current bank regulations paradigm, please do not forget that market and banks already clear for risks and so when a regulator does that too, he only produces dangerous distortions.