Capital requirements for banks based on perceived risks… talk about faith in a flimsy theory

Sir, Wolfgang Münchau writes about “The perils of putting one´s faith in a flimsy theory” in order to decry the not really proven possibility that as has been put forward by some, that 90 percent of public debt to gross domestic product would signify a threshold where more debt begins rapidly to negatively affect economic growth, April 22.

But if we are to talk about flimsy theories, and in which a lot of more faith has been invested, I would hold that the pillar of current bank regulations, namely that capital requirements which are much higher for what is perceived as “risky” than for what is perceived as “absolutely safe” could lead to increased financial stability, that one clearly takes the prize.

Again for the fifth consecutive year I questioned these distorting and odiously discriminating capital requirements during the IMF and World Bank meetings in Washington. Again, as always, I got no answer… for the regulators this is a sacrosanct principle that no one should dare to question... and actually they get upset if you do. Me a heretic!