April 30, 2014

Really beware when a regulators’ identical complacency is added to that of the bankers.

Sir, John Plender writes “Beware the onset of bank industry complacency”, April 30. Of course, we always should beware of that… though let us not forget that “complacency” is based on the assumption that their exposures are absolutely safe, when in fact that is precisely when things get truly dangerous. In other words it is not possible for banks to be complacent when they think they are doing something risky.

Plender describes a period where there was bank stability, even though bank capital was not that high, and that everything went haywire after “Capital regulation arrived with the Basel Accord of 1998”. That should point directly to that the real “new” problem that occurred with bank stability was when it was decided that the capital requirements should be different based on the ex ante perceived risks. And that completely distorts the allocation of bank credit creating dangers to the banks and to the real economy. And yet, that problem is not understood,, or stubbornly ignored… and it is really hard for me to understand the why of that.

Could it be because Plender and others really believe that risk-weighted means risk-weighted? Wow, the power of words!

Let me put it this way…what we must really beware of is regulators adding on a similar, or sometimes an even identical complacency to that of the bankers… both based on the same risk perceptions. Our current regulators are focusing on the expected risks, those that bankers are supposed to be able to take care of on their own… completely forgetting that their role is to think about the unexpected risks. That is what is so terribly wrong.