Bank risks needs to be reflected in its overall capital requirement and not through distorting specific requirements.

Sir, Paul J. Davies makes good arguments when discussing capital requirements for foreign exchange swaps in “Basel’s market clean-up has the wrong swap in mind” January 30. 

Unfortunately, when he writes that the Basel Committee method is “to penalise uncleared swaps with higher capital charges… in most cases rightly so”, and therefore just wants to exclude the foreign exchange swaps, he shows not having understood the fundamental mistake of current regulations, and which is that, when you penalise some you are de facto favoring others, and so de facto distorting. 

If regulators are concerned, for instance with the risk of uncleared derivatives, it is one thing for them to order the bank to increase the capital it holds against all not risk weighted assets, let us say from 6 to 6.2 percent, and quite another, to target specific assets with a higher capital requirements. The first adjusts the capital to the overall risk level of that banks activity, the second just distorts and discriminates against what the regulator perceives is risky.