September 27, 2014

Basel regulations infected banks with a risk-taking deficiency virus, which is mortal to the economy

Sir, Tim Harford in reference to recent food regulations in France writes: “Insisting on home made food ensures neither quality nor Frenchness”, “When regulators are all out to dèjenuer” September 27.

And Harford sort of hints at the possibility that regulatory meddling could spell the end to French cooking and, because better influencing taste buds might be roaming freer in Britain, we might end up with a British cuisine. That would clearly be a tragedy for France, but perhaps also for Britain, which I have often felt derives some national pride from its bad cooking.

Harford also reminds us of “International rules of financial stability did not give us financial stability. Just because a problem exists does not mean that a new regulation will solve it”.

Indeed, the risk-weighted capital requirements imposed on banks, and that very clearly signaled that banks should only lend to the safe and not lend to the risky, ensures neither safe banks nor sturdy economies. The first guarantees excessive exposures, backed with very little capital, to what ex ante is perceived as safe but could ex post be very risky; the second, much too little bank exposures to those our economies might most need our banks to be financing, like our “risky” SME’s and entrepreneurs.

Sir, it amazes me how difficult it is for most financial and economy “experts”, which includes you, and Harford, to understand the fact that current Basel regulations have infected our banks with a risk-taking deficiency virus which is mortal for our economies.

PS. I am not sure about the title of Tim Harford's article as it seems not to be a bad idea that all regulators left their jobs and went out to dèjenuer, and left us alone.