April 03, 2013

We should not go from “pseudoscientific calculation of risk-weighted assets” to Talibanesque capital requirements

Sir, currently there are many papers analyzing the impact of higher capital requirements for banks on their lending rates. Some say it will be minor, others somewhat important.

What is amazing though is that all these papers are written ignoring the fact that based on risk-weights, lower and higher capital requirements which result in differences in lending rates based solely on regulations already exist. These regulatory induced interest rate differential favor much “The Infallible” and thereby discriminate much against “The Risky”; and make it impossible for banks to allocate economic resources efficiently.

Therefore when in John Kay’s “The bungled bailouts that heralds an overdue shift in attitudes” April 4 he writes of “The combination of useless regulation, irrelevant regulations and state guarantees”, I feel I could live with all that, albeit of course much smaller and more disciplined state guarantees, as long as we could get rid of the dangerous regulations which distort.

And without those dangerous distortive regulations, the banks would not need the huge capital that some propose. Frankly ee do not need to go from one “pseudoscientific calculation of risk-weighted assets” extreme to Talibanesque capital requirements, unless of course what we really want is for private banks to disappear, taking refuge in the shadows.

PS. Why has it taken so long for Kay to call the pillar of Basel II regulations “pseudoscientific”? And why is it not in him to admit that I have been calling the Basel bluff for more than a decade now, with more than 1.000 letters to FT, like this letter to John Kay in May 2010. It is a bit petty of him, wouldn’t you say?