July 17, 2013

When regulators layer on personal judgments on top of market judgments, it is a very dangerous affair

Sir, John Kay spiritedly defends that in accounting “prudence, truth and fairness are the product of judgment and personal responsibility, not the observance of particular procedures.”, “The market is not the best place to set a fair price for assets” July 17. And who is going to argue with that?

Unfortunately the other side of the coin is that the personal judgment could be wrong or applied not in substitution of the market but on top of it. For instance, when bank regulators ignored that ex-ante perceived risks were already being cleared for by the markets, and decided to also clear for these in the capital requirements, they created the greatest addiction ever to ex-ante perceived risks which resulted in the current crisis.