Sir, John Kay, while being entirely correct, makes you wonder where he has been the last decade

Sir, John Kay writes “Much of the complexity of modern finance is the result of regulatory arbitrage – avoiding or minimizing restrictions by engaging in transaction with more or less identical effect but more favourable regulatory treatment… Regulatory arbitrage is an inevitable outcome of the detailed prescriptive regulations of financial services” “Arbitrage wastes the talents of finance´s finest minds” August 27.

Of course, Kay is absolutely right, but it makes you wonder where he has been all these years.

Does Kay not know that Basel II, which allowed banks to leverage their equity in the range of 8 to infinite times, made regulatory arbitrage immensely more important for a bank´s return on equity, than being able to allocate credit to the real economy correctly? If, banks had to hold the same capital against all assets, say the Basel II basic 8%, then banks might still be arbitraging, for instance with insurance companies as Kay describes, but regulatory arbitrage would never ever have reached current endemic and monstrous proportions.

And Kay correctly holds that “The better response is to find simpler and more robust principles of regulations? Does he not know that Basel III goes into the opposite direction, increasing the complexity and perhaps even the number of tools in the arbitrage toolbox?

Well clearly Kay has not read the so many letters I have sent him about this issue over the last decade…I guess that happens when you do not belong to a financial columnists intimate network.

That said, I hope that Kay with this recent insight, then would dare start asking the regulators those nasty questions they need to be asked, if our economies are to stand a chance.