Those who are most in need of independent monitoring are the bank regulators

Sir, Kate Burgess and Caroline Binham reports on how the bankers’ “own trade body, British Banking Association, this week called for an independent board to monitor and uphold professional standards in the industry.”, “BBA sets out plans for monitoring of standards” January 16.

Nothing wrong with that but if there are some who really need to review their standards, that is the bank regulators. Any independent review of what they are doing would surely come up with many recommendations and among which I would foremost identify the following:

1. Before regulating the banks the regulators should define the purpose of the banks.

2. Before setting up capital requirements for banks based on perceived risks, the regulators should look at all the empirical evidence out there so as to understand that what is really risky for banks is not what is perceived risky but what is perceived as absolutely safe.

3. When regulating, do no harm, like distorting the banks utmost important function of efficiently allocating economic resources.

Those simple principles, if they had been applied by the regulators, would have saved the banks and us from the current crisis.

Since these were not followed, we ended up with banks having obese exposures against what was perceived as absolutely safe but that ended up to be very risky; and anorexic exposures to those risky small businesses and entrepreneurs who on the margins are the most important actors in the real economy.