October 27, 2013

Why should banks’ willing spirits but weak flesh be able to resist extreme regulatory temptations?

Sir, I refer to Kara Scannell, Tom Braithwaite and Gina Chon’s report on how government is now, seemingly for political reasons, trying to make up for lost time, by laying it hard on those guilty of producing and packaging lousy mortgages into AAA rated securities, “The paper tiger roars”, October 26.

I am a firm believer that those guilty of it should have been fully prosecuted, from day one, but, what most angers me, is how no blame has been placed on those regulators who, by tempting willing spirits but weak flesh too much, caused the whole problem.

Basel II bank regulations, those which the US also signed up on in June 2004, stated that banks, against loans to unrated businesses, were required to hold 8 percent in capital (equity), but, that against AAA rated securities, 1.6 percent sufficed. And that meant that banks were allowed to leverage their equity 50 times more when holding AAA rated securities, than when holding loans to unrated businesses.

How could regulators have expected the banks to resist such extraordinary temptations? Prosecute, as dumb, and have them parade down avenues wearing dunce caps, those regulators who so tempted our banks.