August 31, 2012

How to protect EU’s economy against failed bank regulators

Sir, Wolfgang Schäuble’s “How to protect EU taxpayers against bank failures”, August 31, much provokes a “How to protect EU’s economy against failed bank regulators” 

If we are going to have “a truly effective banking supervisor to enforce a robust single rule book on the [banking] sector” then there are some minimum things that need to happen. 

First and foremost, the supervisor needs to be held accountable for what he does, and must always be willing to explain what he considers to be the purpose of the banks, and publicly answer any questions about how his regulations are intend to support the banks achieving it. 

I say this because if the earnings of EU taxpayers are decreased more by bank regulations, than the costs of paying for bank failures, the offered protection would seem somewhat lacking, to say the least. 

And though Schäuble admits that a “supervisor can only be as good as the rules it enforces, he, as most of his colleagues, still shies away from discussing their “light-touch” rules. 

Capital requirements for banks based on perceived risk, and which among others allowed banks to leverage their equity 62.5 to 1 when lending to Greece, but only 12 to 1 when lending to an unrated small business and entrepreneur… is that supposed to be “light-touch”? No, of course not, and it was really the regulators, playing risk-managers for the world, who, as I see it, caused the current crisis. 

Schäuble also writes “Four years and much regulatory work later, financial markets have become a safer place”… What? Is he running for any election? As far as I can see they have not even begun the needed reforms, to make the banks and the economy safer and more functional, as that requires first, of course, to understand and to acknowledge the mistakes they did. 

Amazingly it seems the regulators still believe it was all mostly the fault of lousy credit rating agencies and banker’s bonuses. And so sadly, their ingrained faulty risk-aversion, is still guaranteeing the dangerous overpopulation of any safe-haven, and that our banks will still keep away from lending to the “risky”, like to our small businesses and entrepreneurs.