June 06, 2013

Dear FT Editor, are you dumb or are you hiding something?

Sir in “The UK’s capital disagreement” June 6, again you refer to the issue of whether banks should have more or less capital, and again without making reference to the distortions caused by current capital requirements which allow the banks to leverage their equity differently depending on the perceived risk. I have written about a thousand letters to you explaining the distortion, and so I must conclude that you are either dumb or that you are hiding something.

For instance, when you write that banks must raise their equity asset ratio “not by shrinking core asset” you evidence not understanding that this has nothing to do with assets being core or not, and all to do with the shrinking of assets against which the regulators demand more capital.

Sir, a banking system with only 5 percent in capital and no risk-weighting, is much safer than a banking system with 25 percent in capital against risk-weighted assets. In fact the higher the basic capital requirement is, the larger the distortions caused by risk-weighting.