August 21, 2013

The incongruency of current risk-weighted capital requirements shine s through again.

Sir, Tracy Alloway and Vivianne Rodriguez end their “US repo finance faces threat from new capital rules” August 21, by quoting a person familiar with the regulatory effort saying “Repo reform is about recognizing the risk in pricing those repo transactions… What we learnt in 2008 was that the risks were not fully appreciated and therefore not fully priced into the transactions.”

That leads to the following two questions: First, if admitting that by fully appreciating the risk, you can fully price the transaction, then why allow for different capital requirements based on different risks? Does that not just create distortions in the allocation of resources between different classes of risk?

Second, if you cannot fully appreciate the risks, is that no what the ordinary not adjusted for risk capital requirements should be there for?